Mervyn King, Columnist

The King Canute Theory of Inflation

A satisfactory theory of inflation cannot take the form, “Inflation will remain low just because we say it will.”

November 24, 2021 at 5:30 AM UTC

Mervyn King was governor of the Bank of England from 2003 to 2013. He is the Alan Greenspan Professor of Economics at NYU Stern School of Business and professor of law at NYU School of Law, and author (with John Kay) of “Radical Uncertainty: Decision-Making Beyond the Numbers.”

Sometimes it just won’t listen to reason.
Photographer: Christopher Furlong/Getty Images

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Central banks have been caught out by the sudden upturn in inflation. In the United States, CPI inflation is now 6.2%. The Federal Reserve’s preferred measure of inflation, core PCE, has risen to its highest level in 30 years. And inflation is well above target in many industrialized countries.

We are told that this burst of inflation is transitory. And for several years, central banks have been giving “forward guidance” that interest rates will remain close to or below zero for the indefinite future. This policy stance relies heavily on the assumptions that expectations drive inflation, and central banks drive expectations. In other words, longer-term inflation is determined by the official inflation target.