The latest speech by the Bank of England’s chief economist Huw Pill contained an admission he probably did not quite mean to make. Speaking at an economic conference in North Macedonia on Tuesday, he warned: ‘Dealing with uncertainty is central to taking monetary policy decisions – perhaps now more than ever.’ This raises one key issue: if monetary policy is being set under conditions of ‘radical uncertainty’ and if the Bank accepts there are limits to what it can do about the inflationary effects of energy shocks, then why is it still clinging to a framework built around CPI inflation?

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The trouble is not that the Bank lacks flexibility or good intentions. It is that it has the wrong nominal anchor. The CPI inflation target of 2 per cent appeared reasonable when it was first set in the more tranquil, inflation-targeting era of the early 2000s. Today, it appears more like a trap in a world of energy shocks, shipping disruptions, tariffs and geopolitical turmoil. It forces the Bank to engage in the same pointless debate: should it tighten into a supply shock to protect its inflation-fighting credentials or ‘look through’ higher prices and run the risk of appearing complacent?

At this month’s meeting, the Bank’s Monetary Policy Committee (MPC) unanimously voted to hold........

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