As the Guardian noted yesterday:
Bank of England rate-setter Catherine Mann has warned there is “very clear upside evidence” that UK inflation could remain above the central bank's 2% target for longer.
Mann, a member of the Bank's monetary policy committee, said monetary policy needs to remain tight to rein in climbing household inflation expectations that threaten to keep price pressures elevated if they spill over into demands for higher pay.
“There is downside risk,” she told an Institute of International Finance event in Washington, pointing to “modest” growth at best and a softening labor market.
However, she added:
“There is very clear upside evidence of inflation being above target, staying sustained above target.”
The obvious thing to do in this case is also the simplest: it is to admit that the target is wrong, and there are many reasons for thinking that.
First, the 2% inflation target is not a law of nature. It is a political choice, invented in the 1990s as part of the neoliberal settlement that handed power from elected governments to supposedly independent central banks. The figure has no theoretical or empirical basis. It was chosen because it sounded reassuringly low, not because it optimised real economic outcomes.
Second, the 2% target assumes inflation is always bad and price stability is always good. But in an economy beset by shocks, whether from pandemics, wars, climate disruptions, supply chain fragility, and shifting trade patterns, modest inflation can be a sign of adaptation and resilience. It reflects adjustment to new costs, and is not necessarily a failure of policy.
Third, the Bank of England's obsession with hitting this arbitrary target has inflicted enormous harm. The policy tool it relies on, in the form of raising interest rates, is blunt, slow, and socially regressive. It punishes mortgage holders and renters, transfers wealth to banks, and suppresses investment and innovation. And as the Bank itself now admits, it does not work well when inflation is caused by external shocks rather than domestic overheating.
Fourth, Mann's insistence that tight policy must be maintained because people might expect higher inflation and might therefore demand higher wages, reveals the Bank's real preoccupation: keeping labour in check. What the Bank fears is not inflation itself, but the possibility that workers might claw back some of the income share lost to corporate profits over the last two decades.
Fifth, when the Bank acknowledges that the economy faces “modest growth” and a “softening labour market,” it is describing the very damage its own policies have created. It has crushed household spending power, deterred public and private investment, and prolonged stagnation. Yet it persists, because it cannot admit that its guiding metric of 2% inflation is meaningless in a world of structural change.
The consequences are clear.
First, the UK remains trapped in a cycle of weak growth, fragile demand, and persistent inequality, all in the name of defending a target that serves no one but financial markets.
Second, the government hides behind the Bank's “independence” to avoid taking responsibility for economic management. Fiscal policy, which is the one tool capable of addressing real-world inflation pressures through investment, infrastructure, and fair taxation, is sidelined.
Third, by treating inflation as a moral failing rather than a policy trade-off, the Bank frames the public as needing discipline rather than support. That logic underpins austerity, wage suppression, and cuts to public services, all of which make the economy less resilient and society more insecure.
The conclusion should be obvious, though it will not be admitted in Threadneedle Street: if inflation remains above 2%, it is not the economy that is wrong; it is the target that's not delivering.
We should be asking different questions:
- What level of inflation is consistent with full employment, sustainable investment, and ecological transition?
- What policies protect those on fixed and low incomes from real hardship, rather than protecting financial assets from mild devaluation?
The answer lies not in punishing the economy to make it conform to an arbitrary figure, but in reforming both the target figure and the broader economic goals, of which this rate should only be one amongst several, to fit the economy we actually live in, meaning full employment and income distribution as well as green goals should also be taken into account.
Inflation targets should serve people and not the other way around.
Taking further action
If you want to write a letter to your MP on the issues raised in this blog post, there is a ChatGPT prompt to assist you in doing so, with full instructions, here.
One word of warning, though: please ensure you have the correct MP. ChatGPT can get it wrong.
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Of course what about those services priced by Government eg Energy, Water, Bus Fares, Prescription Charges, Council Tax etc?
Nothing to stop them being increased at less than the RPI to bring ‘inflation’ down.
Nothing is being done by Government to tackle the Privatisation Premium.
There are various schemes being funded from energy bills that really should come from Taxation
I can go on……………..
Much to agree with
This is king Canute isn’t it? He can’t even pick his chair up and move it back a bit in order to look good. It’s fanatical.
Churchill said ‘A fanatic is one who can’t change his mind and won’t change the subject’.
Households: big ticket items include: housing, food, energy.
https://www.theguardian.com/money/2025/oct/15/britain-biggest-energy-supplier-octopus-bills-on-track-to-rise-by-fifth-in-next-four-years
The 20% rise in energy bills will feed through to rises in food prices for the stuff grown in the UK. (the article is a summary of the finger pointing that the big energy companies engaged in earlier this week @ a select committee meeting wrt the network operators).
All this is quite lost on those in the BoE ivory tower, out of touch & out of their very tiny minds.
(BTW: there are alternatives to the 20% rise – but these are not under consideration @ any gov level – that said – industry etc is voting with its feet/wallets)
The BOE is ignoring the fact that a lot of the inflationary pressure in the UK is due to the very large reliance on imports such as food and raw materials. With the climate crisis growing, food insecurity and lower yields increases prices and the demand for various rare metals etc for transition technology increases again raising prices. What is needed is a policy of increased self sufficiency and a reversal of damaging economic growth that is destroying the planet.
It is interesting that the first official “inflation target” was created as recently as 1990 (by the Reserve Bank of New Zealand which was adopted as policy in March 1990 – the first target being 0 – 2%). It has now become deeply ingrained as an essential article of faith that this is the only way to run monetary policy.
Sure, it worked well for just 18 years (mainly, in my view, due to the entry of China into the global economy) but it all came to a grinding halt in 2008 when it became apparent that monetary policy can only do so much – Fiscal Policy always has to do the heavy lifting as we saw in the CFC and COVID. And, what the inflation target has done is to allow governments to abdicate responsibility from…. errr – governing.
So, for me, the real question is not just “is 2% the right target?” but “who is responsible for hitting the target?”
Accepted
“But in an economy beset by shocks, whether from pandemics, wars, climate disruptions, supply chain fragility, and shifting trade patterns, modest inflation can be a sign of adaptation and resilience.”
Could you do a post about inflation? I still have 1980s thinking running round my head and a lot of fear about it.
OK…..
Catherine Mann is widely published as an American author on Economics. Her career focus has been on the US trade deficit, questioning whether it is sustainable, so it’s little surprise that when appointed to the MPC here she has been similarly fixated on UK imbalances over public impact when voting.
She has voted for a decrease in rates just once (in 33 votes), while voting for an increase more than half of the time (18 times). That one time was when the vote was between decreasing rates by 0.25% or 0.5%, where she obviously favoured the smaller increase.
Her recent analysis (https://www.bankofengland.co.uk/speech/2025/october/catherine-l-mann-keynote-speech-at-resolution-foundation) notes that saving is up and consumption is down, and correctly identifies that things like fiscal drag play a part in reducing real disposable incomes and ability to spent, and that higher interest payable has contributed to a downward shift in real incomes, too. She recognises that poor GDP growth is being impacted by households ability to spend.
However, she appears to have ascribed this to the challenges of periods like lockdown in making people cautious about spending, failing to recognise that the end beneficiaries of furlough, etc, was the richer, and that this change from consumption to spending is also down to the higher interest rates she’s voting for – the rich are incentivised to save the money they can afford to save, while everyone else has to trim relatively important spending where possible. Her own stats point this out, with household costs rising more at the lower end of incomes.
There is clearly a disconnect, with an explicit view that higher inflation is causing ‘economic scarring’ that reduces consumption, and therefore calling for more restrictive policies to ‘reduce scarring’. She admits it as counterintuitive ‘that in order to create an environment conducive to growth, monetary policy must remain restrictive for longer’.
I would go further. It’s not counterintuitive, it’s economic stupidity. If we had ECB-level interest rates and households were on average £200/month better off (roughly), then I can guarantee there would be a loosening of consumption and a reduction in (interest rate incentivised) saving. She calls out the data that shows rising disposable income inequality but fails to connect that to inequality harming consumption because ‘rich people simply don’t need more stuff so they save more’.
Much to agree with
I look forward to reading your thoughts on inflation, Richard. It is something that the majority of people are very bad at understanding, despite justifiable moans about the “cost of living” I frequently hear. I mean the difference between ‘nominal’ and ‘real’ numbers.
One can say that savers are swindled monstrously by inflation – and they love it. Suppose I have £10,000 on deposit ‘earning’ me 10% interest at a time when inflation is also 10%. I get a payment at the end of the year for interest of £1,000 and off I go and spend it. Not bad, eh? So much more fun than the mingy £400 or so I get when inflation is low. But wait a minute. How much paper money do I need to add to my savings to maintain the purchasing power they had when I first put them on deposit? Quite right. I need £1,000. So in fact I have spent £1,000 of my own capital under the illusion that it was interest that I had earned; and to add insult to injury I will probably have to pay tax on it as well.
In my work, it really worries me when I still see 85% of people choosing fixed income from a level annuity at retirement, when escalating annuities (3% pa., 5% pa, etc.) and RPI adjusted ones are usually the far better choice. Just the other day I spoke with a chap who was adamant that he wanted to buy a “higher” fixed annuity. When I pointed out that this pension was to replace his soon to be lost earned income and will likely last him 25 years, I asked him what his salary was 25 years ago – “something like £20,000 a year, I think”. When I asked him how he would have felt had that salary been fixed for the last quarter of a century, he said that would have been unacceptable (stronger language was actually used). His current salary is £44,500.
So why would you do that to yourself now then, I asked. He got my point.
Agreed
Catherine Mann of the MPC spoke to the Resolution Foundation recently
https://www.resolutionfoundation.org/events/explaining-the-consumption-gap/
A fine example of the BofE’s druids speaking down to the peasants and revealing the narrowness of the MPCs thinking and their prejudices. If we are to have an MPC, we need an entirely different cross-section of members with fewer academics like Mann and a lot more people who understand the whole economy – and the environment and society
Thank you Richard for all your good work.
Your post reminds me of Goodhart’s law: “When a measure becomes a target, it ceases to be a good measure”
https://en.wikipedia.org/wiki/Goodhart's_law
I like to think our political elite would understand this but I think not.