Central Bankers Are Poor Archers: The Problems and Failures of Inflation Targeting and Price Stability
The famous quote, “Insanity is doing the same thing over and over again and expecting different results,” is usually attributed to Albert Einstein. While intended as a parable for quantum insanity, such a quote could equally be a parable for inflation policy. With the Bank of England and the Federal Reserve seeking to maintain target rates of 2 percent, the UK inflation rate has only fallen to 10.7 percent from 11.1 percent. Considering inflation is still exceptionally high, it may be time to acknowledge the problems of inflation target policies.
The UK first began inflation targeting as a monetary policy in 1992 to maintain a predicted level of inflation for future economic planning, persistent inflation rate acknowledgment, and price stability maintenance. There are, however, many troubles with inflation targeting. It is important to fully understand the problems with inflation targeting and to define inflation more comprehensively. The common definition of inflation is a general increase in the price level; however, this definition neglects to address the cause of inflation and deals only with the effect.
Inflation has always been an excess increase in the money supply leading to a depreciation in the purchasing power (real value) of money. This definition most accurately explains the cause of inflation whereby the effect of an inflationary policy is a general increase in prices. Prices will not rise uniformly since people demand different goods at different quantities and timeframes, and some goods are more demand inelastic than others.
To use the common definition of inflation is to ignore that the general price level may change due to a shortage of some good used in multiple production periods and processes. As Nicolás Cachanosky, an assistant economics professor at Metropolitan State University, states, “defining inflation by describing a movement of a variable that can have multiple reasons invites confusion. This confusion can eventually lead to errors in monetary policy. More accurate would be to define inflation by its cause rather than its effect.” An inflation target policy simply provides a positive rate of inflation over a prolonged, consistent period of time; this is otherwise known as secular inflation. Keeping in mind a definition of inflation that focuses on the cause rather than the effect, as well as the depreci
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