The August inflation number came out today, and as expected, it was bad. Prices were 4.7 percent higher compared to a year earlier. Today was also a letter writing day for Mr. King and Mr. Darling. The correspondence started with Mr. King, who had to explain why inflation had drifted away from the Government-mandated 2 percent target. He produced the usual excuses; food prices, the oil bubble and the falling exchange rate.
Mr. Darling wrote back a bland response, confirming everything that Mr. King had said in his original letter. Darling also all those nasty foreign shocks, exacerbating what would otherwise be a wonderfully managed macroeconomic environment.
This whole letter writing business is a real disappointment. Wasn't it originally conceived as a ritual humiliation for the governor of the Bank of England? Supposedly, the governor would be traumatized by experience of admitting to the whole nation that he had failed that he would try really hard to keep inflation down to just 2 percent. Instead, it turned out to be an exchange of pleasantries, where the Bank says "inflation is high, but it is not our fault", to which the Chancellor replies "we know it is high, and we know it is not your fault".
We need a stronger incentive mechanism in place. Perhaps, we should link Mr. King's salary directly to the inflation. If it hits 2 percent for a year, he gets a bonus; if it is between 2-3 percent, he receives his basic salary; if it is between 3-4 percent, he gets his pay reduced; and if it is over 4 percent, he gets fired.
If we had this scheme in place, what do you think the inflation rate would be?
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