Abandoning inflation targets isn't the way to promote growth

Jim O’Neil is proposing something that doesn’t actually make sense. That the Bank of England should abandon its inflation targets in order to concentrate upon economic growth. The reason this doesn’t make sense is because it ignores the difference between inflation and growth in the first place:

One of Britain’s most prominent economists has urged Rishi Sunak to scrap the Bank of England’s inflation target to make economic growth its primary goal as Britain attempts a recovery from the pandemic.

Lord Jim O’Neill, a former Treasury minister who is understood to be in talks with the Government about the creation of a new state investment board for the North, called on the Chancellor to change the Bank’s remit to target nominal GDP instead of inflation. In an interview with The Sunday Telegraph, the former Goldman Sachs chief economist suggested the radical move would help engineer a V-shaped recovery from the coronavirus recession.

What we’re interested in is real GDP growth. The difference between nominal and real GDP growth is, by definition, the inflation rate. Inflation, above the rate that greases the wheels of relative price changes, being something that is harmful.

It’s fine to change emphasis, to say that we’d like NGDP to be rising, with some modest portion of that being inflation and the rest real growth, but that’s just setting the same target we already have. We desire maximal real growth with minimal inflation. But to say that we should abandon inflation as a target doesn’t make economic sense. It also doesn’t make political sense as inflation is very much easier to engender than real growth and do we really want politicians to be able to say they’re hitting the targets just by making everything more expensive for us?