the consequent fall in output and rise in unemployment would have been greater. these two considerations mean that a monetary policy response would most likely have only injected extra volatility to inflation : by the time the price shocks wore off, we would have been facing a severe undershoot of the inflation target and deflation would have been a distinct possibility. the path of output would have been unnecessarily volatile and the deviation of inflation from target might have been different but no more acceptable. the possibility of such shocks, and indeed the ability to respond as we have done, was foreseen when the inflation target regime was conceived. indeed our remit from the government is clear on the consequences. the remit says that ( with my emphasis ) : “ the framework takes into account that any economy at some point can suffer from external events or temporary difficulties, often beyond its control. the framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and the latter would affect cpi directly though its impact on imported consumer goods and services, and indirectly by affecting the cost of domestic production reliant on imported intermediate inputs. the real exchange rate shock is likely to push down on domestic demand but should increase export supply. bis central bankers ’ speeches disturbances. attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output ”. 6 in other words, if shocks drive inflation sufficiently away from the target, the mpc are allowed to choose how quickly to return inflation to 2 % and should explain such policy decisions via the open letter system. i have often been asked whether or not changes to the target, or the remit, or to cpi itself would help us to set policy. the answer is a clear no. of course, the government can decide to change these things if it wants to, but that wouldn ’ t magic away the problem. the unfortunate and difficult truth is that the shocks that have hit the economy recently have not been caused by monetary conditions. they are real economy shocks which make us individually and collectively worse off – we have to pay more tax, we have to pay more, in real terms, for petrol, gas, electricity and imported goods or services. the choice that monetary policymakers face is how much of these relative price shocks should be accommodated by a higher level of prices, and how much should be accommodated by a squeeze on nominal wages ( and higher unemployment ).

on one side, higher inflation expectations could become entrenched making it very costly for the mpc to subsequently bring inflation back to target. on the other side, the economy could be much weaker than we expect pushing down on inflation and risking deflation. recovering to the target from that could be even harder ( at least in my personal view ). mpc members place different weight on these possibilities and reach different judgements accordingly. but it is clear to all of us that both risks exist. i believe the mpc is charting the right course through these difficult times. despite temporarily higher inflation for a period, and notwithstanding all the uncertainty, i want to assure you that we remain determined to bring inflation back to target in the medium term, consistent with our remit. for more information, see britton, e, fisher p, and whitley j, “ the inflation report projections : understanding the fan chart ”, bank of england quarterly bulletin, february 1998, pages 30 – 37. bis central bankers ’ speeches