Tougher times for inflation targeters: Over the past two decades, inflation targeting has become the holy grail of modern central banking. Most central banks have adopted some form of inflation target and have set interest rates mainly with a view to stabilising inflation around that target over the medium term. However, the recent experience poses a major challenge for inflation-targeting central banks, for two reasons:
First, the wild gyrations of commodity prices and the boom-bust credit and economic cycle have caused big swings in inflation. Only a year ago, actual inflation was way above most central banks’ targets; now it is far below in most cases. This has contributed to rising uncertainty about the longer-term inflation outlook, as illustrated by more volatile market-implied inflation expectations and by a much greater dispersion of economists’ inflation forecasts.
• Second, the asset price bubble and bust has been a useful reminder that stabilising consumer price inflation does not automatically stabilise asset prices. On the contrary, as we have argued repeatedly over the years, by focusing too narrowly on consumer prices, which were kept low for a long time by non-monetary factors such as globalisation, deregulation and IT-led productivity increases, central banks fostered asset price inflation by keeping interest rates too low for too long. Looking ahead, many central banks are thus likely to pay more attention to asset prices in setting monetary policy. This, in turn, may lead to bigger and longer-lasting deviations of inflation from target and thus constitutes a challenge to the credibility of their inflation targets (see “The Morning After”, The Global Monetary Analyst, April 1, 2009).
Higher Savings Is Not Consumer Retrenchment – Richard Berner, Morgan
Tougher times for inflation targeters
Tougher times for inflation targeters: Over the past two decades, inflation targeting has become the holy grail of modern central banking. Most central banks have adopted some form of inflation target and have set interest rates mainly with a view to stabilising inflation around that target over the medium term. However, the recent experience poses a major challenge for inflation-targeting central banks, for two reasons:
First, the wild gyrations of commodity prices and the boom-bust credit and economic cycle have caused big swings in inflation. Only a year ago, actual inflation was way above most central banks’ targets; now it is far below in most cases. This has contributed to rising uncertainty about the longer-term inflation outlook, as illustrated by more volatile market-implied inflation expectations and by a much greater dispersion of economists’ inflation forecasts.
• Second, the asset price bubble and bust has been a useful reminder that stabilising consumer price inflation does not automatically stabilise asset prices. On the contrary, as we have argued repeatedly over the years, by focusing too narrowly on consumer prices, which were kept low for a long time by non-monetary factors such as globalisation, deregulation and IT-led productivity increases, central banks fostered asset price inflation by keeping interest rates too low for too long. Looking ahead, many central banks are thus likely to pay more attention to asset prices in setting monetary policy. This, in turn, may lead to bigger and longer-lasting deviations of inflation from target and thus constitutes a challenge to the credibility of their inflation targets (see “The Morning After”, The Global Monetary Analyst, April 1, 2009).
Higher Savings Is Not Consumer Retrenchment – Richard Berner, Morgan