Monetary policy is the Key

The case for a top-down approach
By Samuel Brittan

Published: August 2 2007 18:47 | Last updated: August 2 2007 18:47

“The past 15 years have seen inflation settle at low levels throughout the industrialised world. And many countries in the developing world, which had previously experienced high inflation, have seen it falling. If you ask the average business person why this is the case, he or she is almost certain to reply that it is down to cheap imports from the Far East and eastern Europe. Monetary policy probably won’t get a mention.”

These are the words of Charles Bean, the Bank of England’s chief economist, in an article called “Globalisation and Inflation” in the January-March issue of World Economics. Mr Bean is not shy to tackle this version of businessmen’s economics, saying that it is based on a confusion of relative prices with the absolute price level. A flood of cheap imports from newly industrialising countries may temporarily depress inflation. This will leave consumers better off, with more to spend on other products whose prices may then be driven up. Even if this does not happen, “if a country does not fix its exchange rate and is free to pursue an independent monetary policy, it can ultimately always choose its own inflation rate”.