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inflation target
The goal of monetary policy in many countries is to ensure that inflation is neither too high nor too low. It became fashionable during the 1990s to set a country's central bank an explicit rate of inflation to target. By 1998, some 54 central banks had an inflation target, compared with just eight at the end of 1990, the year in which New Zealand's Reserve Bank became the first to be set a target. In most industrialized countries, the target, or, typically, the mid-point of a target range, for consumer-price inflation is between 1% and 2. 5%. The reason it is not zero is that official price indices overstate inflation, and that the countries would prefer a little inflation to any deflation. Monetary policy takes time to have an impact. So central banks usually base their policy changes on a forecast of inflation, not its current rate. If forecast inflation in two years' time, say, is above the target, interest rates are raised. If it is below target, rates are cut. Why have an inflation target? Setting an inflation target usually goes hand-in-hand with allowing a central bank considerable discretion in setting policy, so transparency in its decision-making is vital and is therefore usually increased as part of the process of adopting a target. More fundamentally, by making it easier to judge whether policy is on track, an inflation target makes it easier to hold a central bank to account for its performance. The pay of central bankers can be designed to reward them for achieving the target. But some central bankers argue that an inflation target restricts their policy flexibility too much, which is one reason why the world's most powerful central bank, America's Federal Reserve, has argued (so far successfully) against having one.
- Part of Speech: noun
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- Industry/Domain: Economy
- Category: Economics
- Company: The Economist
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