InflationTargeting

Inflation targeting is a monetary policy framework in which a central bank commits to achieving a publicly announced numerical inflation target or target range over a medium-term horizon. It relies on transparent communication, regular publication of inflation forecasts, and a degree of policy independence. The central bank uses its instruments, especially the policy rate, to steer inflation toward the target while considering output and other conditions.

Key features include an explicit target, a published forecast framework, accountability for deviations, and a forward-looking, forecast-driven approach rather than a focus on money-supply targets. The horizon for the target is commonly one to two years, with longer-term considerations allowed through projection paths.

History: Inflation targeting emerged in the 1990s and spread to many economies. Early adopters included New Zealand (1990), the United Kingdom (1992), Canada (1991), and Sweden (1990s). Over time, it became the dominant framework in many advanced and several emerging economies. Targets are frequently near 2 percent, or within a symmetric range around that level.

Operation: central banks disclose targets and forecasts, hold regular policy meetings, and justify decisions with deviations of inflation from target. Policy instruments are used to align actual inflation with the target path, and communications, including forward guidance, help shape longer-term expectations.

Advantages and criticisms: Proponents argue that inflation targeting anchors expectations, improves transparency, and stabilizes inflation and output. Critics note susceptibility to supply shocks, the need for credible institutions, potential trade-offs with employment or financial stability, and the risk of incomplete transparency if forecasts or targets are ambiguous.

Variants: Flexible inflation targeting allows short-term deviations for stabilizing the real economy; price-level or nominal GDP targeting are alternatives. In practice, many central banks pursue a flexible, forecast-based inflation targeting regime with varying degrees of rigidity.