Forty Years of Inflation Targeting: Success for Prices, Failure for Living Standards?

For the past four decades, central banks have pursued low and stable inflation as one of the primary objectives of economic policy. The widespread adoption of inflation targets—typically around 2%—has been credited with ending the high inflation era of the 1970s and creating a more stable economic environment.

On the surface, the policy appears to have been a success. In the United Kingdom, inflation averaged around 7–8% during the 1970s and early 1980s but has averaged closer to 2–3% since inflation targeting was introduced in 1992. Wage growth has also become more moderate, reducing the risk of wage-price spirals that once destabilised the economy.

Yet a critical question remains: has the achievement of low inflation translated into a meaningful improvement in disposable income and living standards for ordinary households?

The answer depends on what prices are being measured.

The Missing Cost in Inflation Statistics

For most households, accommodation is the single largest expenditure. Whether through rent or mortgage payments, housing costs typically consume a larger share of income than food, transport, utilities, or clothing.

In the early 1980s, the average UK household spent approximately 15–20% of disposable income on housing costs. Today, the figure is closer to 25–35% for the average household and substantially higher for younger renters in London and the South East.

The situation is even more striking for first-time buyers. In the early 1980s, the average UK house price was around three to four times average annual earnings. Today, the ratio is closer to eight to nine times earnings nationally and considerably higher in parts of southern England.

For renters, the trend is similar. Private sector rents have risen faster than incomes in many regions over the past twenty years, resulting in a larger proportion of household income being devoted simply to securing accommodation.

Consumer Inflation vs Asset Inflation

The central weakness of inflation targeting is that it focuses primarily on consumer prices rather than asset prices.

The cost of televisions, computers, household appliances and many manufactured goods has fallen dramatically relative to wages over the past forty years. Globalisation, technological progress and international trade have made many consumer products cheaper and more accessible.

However, the same period has seen enormous increases in the value of financial assets and residential property.

In the UK, average house prices have risen from around £25,000 in the early 1980s to well over £280,000 today. This increase far exceeds both general inflation and average wage growth.

As a result, many households experience an economic reality that differs markedly from official inflation statistics. The price of consumer goods may be stable, but the cost of acquiring the most important asset in life—a home—has become increasingly prohibitive.

Disposable Income: The Real Measure of Prosperity

Economic success should ultimately be measured not by inflation alone but by the amount of income households retain after meeting essential expenses.

A worker whose wages increase by 3% while housing costs increase by 6% is not becoming more prosperous, regardless of whether inflation remains close to the central bank’s target.

The relevant question is therefore not whether inflation has been controlled, but whether households have more discretionary income after paying for accommodation, energy, transport and taxation.

For many younger households, the answer appears increasingly negative. Home ownership rates among younger age groups have fallen substantially since the early 2000s, average mortgage deposits have become harder to accumulate, and a growing proportion of income is committed to rent.

An Incomplete Definition of Economic Success

None of this is an argument against low inflation. High inflation erodes purchasing power, distorts investment decisions and disproportionately harms lower-income households.

However, four decades of experience suggest that low inflation is a necessary condition for prosperity, not a sufficient one.

Central banks have largely achieved their objective of stabilising consumer prices. Yet the economic experience of many households is increasingly shaped not by the price of goods in the shopping basket but by the cost of housing.

If housing absorbs a rising share of household income while wages struggle to keep pace, then low inflation alone cannot be regarded as evidence of improving living standards.

The central question for policymakers should therefore be broader than whether inflation remains close to 2%. It should be whether ordinary households are retaining a larger share of their income after paying for the essentials of life.

By that measure, the record of the past forty years is far more mixed than inflation statistics alone would suggest.