The experience of the past year has made clear that the public detests inflation; both finance ministries and central banks are being criticised for losing control of price growth
Save time by listening to our audio articles as you multitaskShould the somewhat arbitrary goal of 2% be changed? The question may seem a little churlish when central banks are so flagrantly missing their existing targets: annual inflation in America, Britain and the euro area, for instance, is running at around 9%. The Federal Reserve’s experiment with “flexible average-inflation targeting” has coincided with the central bank allowing inflation to get out of hand.
Deciding which low but positive number is desirable is trickier. Is a target of 2% actually superior to one of 3% or 4%, for instance, or does it merely owe its exalted status to tradition? The relative damage done by extremely high or accelerating price growth may be easily visible, but economists have struggled to identify differences in the costs to an economy from different stable, low-single-digit inflation rates.
Higher inflation targets are a different solution to the problem of the lower bound. If the public expects the central bank to generate more inflation in future then the interest rate, in real terms, can still be sharply negative, stimulating the economy even without nominal interest rates needing to venture below zero. Allowing moderately higher inflation in normal times could therefore make it easier for the central bank to give a boost to the economy when trouble hits.
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