Inflation Above (Official) Target

Among its other benefits, a policy regime of inflation targeting, where a central bank has a clear primary focus of keeping inflation as close as possible to a certain level, has a pleasing clarity.  For example, the Bank of England Act of 1998 states:

In relation to monetary policy, the objectives of the Bank of England shall be –
(a) to maintain price stability, and
(b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.  

Compared to the mushy "dual mandate" of the Federal Reserve Act,

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.  

Matthew Yglesias finds the unambiguity of the Bank of England's regime refreshing:

The genius of this is that you now don’t need to have monetary policy matters be the subject of debates on op-ed pages and blogs with various board members giving interviews and speeches. If 2 percent inflation is too much inflation, well that’s on the heads of the politicians who set the target. If inflation is over 2 percent, then the Bank of England needs to tighten. And if inflation is below 2 percent, then the Bank of England needs to expand. Consequently, when faced with a giant downturn the Bank of England has had none of the self-induced paralysis of the Fed, the ECB, or the Bank of Japan. 

Yes, but... the Bank of England has been missing its target lately:

I think the BofE deserves great credit for being aggressive in its response to the economic crisis, but the inflation targeting regime forces it into making awkward excuses, like this from its inflation report:

CPI inflation remained well above the 2% target, elevated by temporary effects stemming from higher oil prices, the restoration of the standard rate of VAT to 17.5% and the past depreciation of sterling.  And the forthcoming increase in the standard rate of VAT to 20% will add to inflation throughout 2011.  As these effects wane, downward pressure on wages and prices from the persistent margin of spare capacity is likely to pull inflation below the target.  But the pace and extent of that moderation in inflation are impossible to predict precisely.  

The FT's Money Supply blog notes that the IMF approves of Britain's current loose monetary/tight fiscal policy mix (see also Free Exchange's comments).  But it is not clear that the inflation target has been helpful... indeed, the risk is that, by allowing inflation exceed the target, the Bank of England is damaging the "credibility" that inflation targeting was designed to buy.  Considering the circumstances, I'm inclined to believe that's a risk worth taking, it does raise questions about the whole inflation targeting concept. 

Inflation targeting is still relatively new. New Zealand was the first country to implement it, in 1988. The current global slump is inflation targeting's first real test, and, after the dust settles it will be interesting to evaluate how it performed.