mervyn king : the new inflation target speech by mr mervyn king, governor of the bank of england, at the annual birmingham forward / cbi business luncheon, birmingham, 20 january 2004. * * * i have always wanted to perform at villa park. now is my chance. economists at villa park are not as unusual a sight as you might think. it is not well known that john maynard keynes also came to villa park. in september 1913 keynes was visiting birmingham and decided to see the match of the day between the two top teams in the country - aston villa and blackburn rovers. on the following day, keynes wrote to duncan grant1 : “ there has been some amusement here, but mixed up with a good deal of boredom. birmingham has a very definite character. i went yesterday with 40, 000 other people to one of the peak football matches. the scene was very much as i imagine the coliseum. the ground is built on the same model - an immense oval rising all round tier above tier in about 50 rows so far as i could count. the crowd maintained a dull roar nearly all the time, rising into a frenzy of excitement and rage when the slightest thing happened. the match was between the two principal “ league ” teams of england. the local people were beaten by a team from lancashire, who had, so i was told, ‘ the best right wing in england, and the most expensive ’ ”. sadly, as keynes recorded, aston villa lost 3 - 1 and finished that season as runners - up to blackburn. it is unclear whether keynes ever again visited a football ground, and there must be a real possibility that, for him, villa park was the sum total of his football experience. in later years some of keynes ’ s disciples forgot not only his connection with villa park but also his view that price stability was a necessary condition for a successful economy. tomorrow is the 80th anniversary of the death of lenin, and it was to lenin that keynes attributed the remark : “ the best way to destroy the capitalist system was to debauch the currency. by a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens ”. after doing their best to test this proposition, successive british governments have committed themselves to stable and low inflation. and for the past decade, inflation has ceased to be a dominant consideration in the economic decisions of families and businesses. that has been achieved by aiming at a

symmetrical inflation target. crucial to the success of such a policy is the ability to anchor inflation expectations on the target. for this to be the case, the target must be clear and well understood. from may 1997 the target was 2½ % for rpix inflation. but in december the chancellor gave the monetary policy committee a new target for inflation. it is 2 % as measured by the consumer prices index or cpi, formerly known as the harmonised index of consumer prices. what is this new inflation measure, and how will it affect monetary policy? on the rpix measure, inflation was at or above target for the whole of last year. in contrast, the cpi measure of inflation was below 2 % throughout the same period. indeed, cpi inflation has been below 2 % for all bar three months since may 1997, and it is almost six years since it was last above 2 %. how can it be possible for inflation to move from above to below target - just like that? to answer that question, we need to examine how inflation is calculated. inflation is measured as the increase in the price of a particular basket of goods and services over the previous twelve months. so there are as many measures of inflation as there are baskets. since no two people in this room spend their income on exactly the same items, in principle each of you could construct your own measure of inflation. the office for national statistics calculates an average inflation measure by weighting together the inflation rates of over 650 different goods and services, using as weights the estimated expenditure on each item for a representative household. but where unpublished writings of j. m. keynes, copyright of the provost and scholars of king ’ s college, cambridge to whom i am grateful for permission to publish this extract. a reference to the letter appeared in skidelsky, r. john maynard keynes volume 1 : hopes betrayed, 1883 - 1920, macmillan, london, 1983, page 280. the official attendance on 13 september was 38, 575 ; the villa scorer was the incomparable clem stephenson, who may have lacked pace but whose passes were, according to contemporary observers, “ as sweet as stolen kisses ” ; and the ‘ most expensive ’ right winger for blackburn rovers was john “ jocky ” simpson who cost blackburn a record fee of £1, 850 when he was transferred from falkirk in 1911. do those prices come from? each month - on “ index day ” ( either the second or third tuesday of the month ) - around