Much of the language used to describe monetarypolicy, such as "steering the economy to a soft landing" or "a touch on the brakes", makes it sound like a precise science. Nothing could be further from the truth. The link between interest rates and inflation is uncertain. And there are long, variable lags before policey changes have any effect on the economy. Hence the analogy that likens the conduct of monetarypolicy to driving a car with a blackened windscreen, a cracked rearview mirror and a faulty steering wheel.

Given all these disadvantages, central bankers seem to have had much to boast about of late. Average inflation in the big seven industrial economies fell to a mere 2.3% last year, close to its lowest level in 30 years, before rising slightly to 2.5$ this July. This is a long way below the double-digit rates which many countries experienced in the 1970s and early 1980s.

It is also less than most forecasters had predicted. In late 1994 the panel of economists which The Economist polls each month said that America's inflation rate would average 3.5% in 1995. In fact, it fell to 2.6% in August, and is expected to average only about 3% for the year as a whole. In Britain and Japan inflation is running half a percentage piont below the rate predicted at the end of last year. This is no flash in the pan; over the past couple of years, inflation has been consistantly lower than expected in Britain and America.

Economists have been particularly surprised by favourable inflation figures in Britain and the United State, since conventional measures suggest that both economies, and especially America's, have little productive slack. America's capacity utilization, for example, hit historically high levels earlier this year, and its jobless rate(5.6% in August) has fallen below most estimates of the natural rate of unemployment - the rate below which inflation has taken off in the past.

Why has inflation proved so mild? The most thrilling explanation is, unfortunately, a little defective, some economists argue that powerful structural changes in the world have upended the old economic models that were based upon the historical link between growth and inflation.
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