Target or trap? Economist tells sixth-formers why the Government’s 2% inflation goal is too low

Target or trap? Economist tells sixth-formers why the Government’s 2% inflation goal is too low

Old Elizabethan academic and economist Sandeep Mazumder queried the Bank of England’s 2% inflation target and suggested it should be higher – not because it is too cautious, but paradoxically because it is too risky.

Sandeep (OE 1993–2000), who is Dean of Hankamer School of Business at Baylor University, Texas, spoke to the group of Year 12 economists before yesterday’s news that the inflation rate had fallen to 2.3%.

Although this is its lowest level in almost three years, the figure was still higher than expected. Political commentators believe that Prime Minister Rishi Sunak has called the early General Election on the strength of the apparently improving economic outlook.

Dean Sandeep, who has published widely on inflation dynamics and the Great Recession of 2007–2009, argued that inflation at 2% would limit the Government’s room for manoeuvre in cutting interest rates during times of economic difficulty, making it hard to escape a recession.

He argued instead for adopting a 3 or 4% target, which would give more flexibility with interest rate cuts, without the risk of inflation dropping to 0%. This is the level below which rates cannot be cut (the ‘zero lower bound’) without the potentially disastrous economic risk of people hoarding cash, rather than saving it in banks, the so-called ‘liquidity trap’.

Economics teacher Celia Wallace thanked Dean Sandeep, who spoke remotely to the School’s Gresham Society for Economics. He is a member of QE’s 450 Club member and has been very supportive of the Economics department.

“Sandeep introduced several new concepts to improve pupils’ depth of understanding, including the Fisher Equation to calculate real interest rates and the problem of the zero lower bound, which was the main basis of his talk.

“Within his critique of inflation targeting, Sandeep showed other policy options which countries can often consider, including price-level targeting – where a specific price index is targeted, rather than a growth rate.”

Afterwards, the sixth-formers asked a range of questions, including Avi Juneja’s cautious query about the issue of real wage cuts with a target of 3% or 4% inflation, and Abyan Shah asking about which method of targeting would be most effective for the UK: inflation targeting, price-level targeting, or average inflation targeting (a hybrid of both systems).

Sandeep gave plentiful career advice to all. He strongly expressed the need to follow one’s strengths and passions. He said he had chosen to go into academia and research as it was his passion, while also giving more of a life balance compared to other options, such as  banking.