Inflation targeting is dead, or so we are told with increasing frequency nowadays. Invented in the 1990s and widely propagated in the 2000s, targets for consumer price inflation failed to prevent the asset price bubble prior to 2008, or the subsequent financial collapse. Many investors now believe that inflation targets have been abandoned in all but name.
There is, however, a major problem with this line of argument. It does not tally with what the major central banks say they are actually trying to do, either in public or in private. Far from disappearing, inflation targets continue to gain prominence. Furthermore, they still play an essential role in ensuring good economic performance.
As recently as January 2012, the Federal Reserve formalised a 2 per cent inflation objective, while the Bank of Japan did the same for the first time only last month. The ECB continues to face heavy criticism because it pays such close attention to keeping inflation “below but close to” 2 per cent. Only the Bank of England can be seriously accused of downgrading its inflation objective in recent years, and even that may have changed in the past couple of MPC meetings. Read more