Price-level uncertainty and stability in the UK

Was the UK price level more stable and predictable before World War I or after World War II? We answer these questions by estimating changes in volatilities of transient and permanent components of inflation over the period 1791-2011. For much of the 19th century, trend inflation and its innovation variance were both close to zero, but transient inflation was variable. After World War II, transient volatility was substantially lower, but trend inflation was higher and more variable. On balance, future price levels were least uncertain on the eve of World War I under the classical gold standard, before the Great Inflation under Bretton Woods, and in the 2000s after the Bank of England adopted a policy of inflation targeting. But they were most stable just before World War I. For price-level stability, the decline in transient volatility was more than counterbalanced by the rise in the level and volatility of trend inflation. For price-level uncertainty, the two forces roughly offset