Targeting Inflation : The United Kingdom in Retrospect

had involuntarily exited from its fixed exchange rate regime and had experienced a sharp currency depreciation as a result. The macroeconomic background was one of high and rising inflation expectations but a contracting real economy. The initial conditions for inflation targeting were not, therefore, particularly propitious. Despite this unfavorable backdrop, the United Kingdom’s experience with inflation targeting has been relatively successful so far. Retail price inflation has averaged 3 percent per year since 1993, and since 1997 it has been at or slightly above the Bank of England’s target of 2.5 percent. Inflation expectations, derived from the difference in yields between nominal and inflation-indexed bonds, have been anchored at around 2.5 percent for over a year. What factors, conjunctural and institutional, have contributed to this success story?