inflationtargeted

Inflation targeting is a monetary policy regime in which a central bank publicly commits to achieving a specified numerical target for inflation, usually measured by the consumer price index (CPI), over a defined horizon. The framework emphasizes transparency, credibility, and accountability, and relies on the central bank’s ability to steer inflation expectations through its policy instruments.

Key features include an explicit inflation target announced publicly, a symmetric band or level, a forecast-based decision process, and regular communication of projections and risks. The main instrument is the policy interest rate; some regimes also use other tools to influence liquidity. Central banks pursuing inflation targeting typically emphasize independence and credibility through transparent, rule-based communication.

Targets are typically CPI inflation around 2%, with a horizon of one to three years. The framework is often described as flexible inflation targeting, allowing short-run trade-offs with output or employment and adjustments for supply shocks or financial stability needs. Some countries use a precise target; others use a target range.

Advantages include greater credibility and transparency, better expectation anchoring, and lower inflation bias. Critics note potential conflicts with growth, reliance on forecasts, and challenges during liquidity traps or rapid financial changes. The regime has evolved to address crises, with adaptations such as longer horizons, average inflation targeting, and supplementary macroprudential tools.

Origin and adoption: Inflation targeting emerged in the late 1980s and early 1990s, with New Zealand as a pioneer. Since then, many advanced and emerging economies have adopted inflation targeting in various forms. Differences across countries reflect choices about target levels, bands, horizons, and how strictly the target is treated.