Professor Blanchflower, an outgoing member of the Monetary Policy Committee and one of the pun- dits credited with predicting the recession, gave a lecture at Cardiff University on the future of monetary policy last week.
He says central bankers have failed to address house and asset price bubbles and claims there is a consensus in favour of including house prices in the Consumer Prices Index, the Bank of England’s chosen measure of inflation.
Blanchflower says: “The present institutional framework has been found wanting. While we cannot expect to abolish the business cycle, the credit crisis has been too costly and reform is required.
“The ‘one tool, one target’ approach to monetary policy of using the base rate to target CPI inflation is inadequate.”
He adds: “House prices should be included in the target the MPC considers each month.
“House prices are the most important asset for many households as mortgage lending is secured against them.”
Blanchflower concedes there is a difficulty in consistently measuring housing costs across Europe. But he says this problem could be overcome by reverting to the MPC’s previous inflation index which included an element of housing costs but ex-cluded mortgage payments.
Blanchflower’s comments come as the rate of annual inflation as measured by the CPI hit 3.2%, overshooting the Bank’s official 2% inflation target.
The Retail Prices Index, which includes housing costs such as mortgage payments and Council Tax payments, fell to zero in February.