Is 2% sort of a magical number?30 Jan 2023 08:27
Top central bankers, who credit the use of a 2% inflation target with anchoring decades of stable prices, are facing the first full-on test of how well that approach to monetary policy works once prices have erupted, and how strictly they'll enforce it if damage to their economies intensifies.
By announcing an inflation goal, central bankers feel they build credibility for themselves and focus the planning of households and firms in ways that help keep inflation controlled. It's a concept that seemed supported by the facts as the use of inflation targeting spread across the developed world from New Zealand in 1990 through Europe and to the United States and Japan in 2012 and 2013.
Those decades, up to the end of the first year of the coronavirus pandemic in 2020, saw inflation largely contained.
But they also coincided with trends in globalization, technology and demographics that helped. Since the onset of the pandemic and continuing with Russia's invasion of Ukraine, those same forces may now be pushing prices in the other direction, challenging that shared monetary policy framework with a sort of adversity it has never confronted and, with ongoing supply shocks, may find hard to accommodate….
"Is 2% sort of a magical number?" U.S. Federal Reserve Vice Chair Lael Brainard said at a forum earlier this month. "Probably not. But it's our number, and we are very committed to bringing inflation back to 2% ... Achieving that target is just core to our overall monetary policy," Brainard said, a sentiment echoed in central bank headquarters from Frankfurt to London to Tokyo.
"Let me be quite clear, there are no ifs or buts in our commitment to the 2% inflation target," Bank of England Governor Andrew Bailey said last year. "That's our job, and that's what we will do."
Well Mr Bailey You've failed, your sacked.
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