SUERF Policy Brief Targeting inflation (more) flexibly Abstract

For example, for the United States the contribution of the common component fell from around 60% during the high-inflation years – up to the mid-1990s – to around 20% in the subsequent low-inflation period (Figure 1, left-hand panel). [...] For Thailand, the decline of the common component coincided with the adoption of inflation targeting – the common component rose during the global inflation surge but has since fallen (right-hand panel). [...] Since the early 2000s, globalization – in particular, the integration of China into world trade and the opening up of EMEs – along with rapid technological developments led to a long secular decline in the price of tradeable goods relative to that of non-tradables, mainly services. [...] It can thus be argued that the greater role of relative price fluctuations in driving overall inflation create a need for increased flexibility both in terms of greater tolerance for the size of deviations from inflation targets, as well as the time horizon over which inflation is brought back to target. [...] The essence of inflation targeting is to anchor expected and actual inflation to a low and stable regime, underpinned by transparent and predictable conduct of policy.