Readers Question: What are the monetary policy committee tools which are use to set the inflation target?
The inflation target is set by the Government. The government set the inflation target at CPI 2% +/-1. If the inflation rate moves away from these targets the MPC have to write a letter of explanation to the chancellor.
A very important job of the MPC is to try and forecast future inflation. Future inflation trends determine how and when they change monetary policy. For example, if they forecast a fall in the UK inflation rate in 2008, they could cut interest rates to boost the economy and the housing market.
To Forecast future inflation the MPC look at various economic statistics which give an insight into the amount of spare capacity and levels of inflationary pressure. They look at other 30 statistics including:
- Economic Growth (compared to long run trend rate)
- Exchange Rate
- Money Supply
- Balance of Payments
- Housing Market
- Consumer Confidence
- Level of Investment
- Amount of Spare capacity surveys
The MPC forecast inflation for upto 2 years in advance, the longer the time period for more inaccurate forecasts tend to be.
- Difficulties of Central bank in controlling inflation
- MPC and setting of interest rates
- Inflation Forecasts
- Bank of England and inflation forecasts