“Why did nobody notice it?” asked the Queen a few months ago, at the LSE. The simplest answer is that inflation targeting was a disaster. People wrongly thought that if you controlled the prices, all else would follow. This was wrong, hopelessly wrong, calamitously wrong. Everyone gushed about what a great idea Bank of England independence was. In fact, monetary policy management in the last ten years was a disaster. Inflation targetting was a false god. And the fact that no one says so now is a sign of just how far we are from understanding what happened in the last ten years.
As Friedman taught the world, controlling the supply of money is the key to stability. But the error was to think that inflation was a proxy for money supply. It was true when the Tories started inflation targeting, post the ERM debacle. But gloablisaion changed that: China prices provided a deflationary shock.
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