As global growth slows and price levels remain elevated, central banks may be tempted to raise their inflation targets. But Brazil’s recent economic difficulties show that adjusting the definition of price stability to support fiscal spending may well result in higher inflation and slower growth.
LONDON – As the most aggressive wave of monetary tightening in four decades slows the world’s largest economies, a growing number of analysts are questioning whether central banks should raise their inflation targets beyond the current 2%. After all, is it worth sacrificing growth just to gain an extra inch in the fight against inflation?
But as Brazil’s recent economic difficulties demonstrate, the tradeoff between supporting GDP growth and fighting inflation cannot be wished away. Ultimately, accepting slightly higher price levels by raising central-bank targets will most likely result in both higher inflation and a weaker economy.
Amid pressing security and climate-related challenges, policymakers may be tempted to move the goalposts when it comes to price stability. For most of the past 15 years, developed economies struggled to generate inflation, with the US Federal Reserve and other central banks often falling short of their 2% target rates. But the COVID-19 pandemic, the escalating tensions between the United States and China, and Russia’s invasion of Ukraine have led to persistent supply-chain constraints, fundamentally altering the inflation landscape.
LONDON – As the most aggressive wave of monetary tightening in four decades slows the world’s largest economies, a growing number of analysts are questioning whether central banks should raise their inflation targets beyond the current 2%. After all, is it worth sacrificing growth just to gain an extra inch in the fight against inflation?
But as Brazil’s recent economic difficulties demonstrate, the tradeoff between supporting GDP growth and fighting inflation cannot be wished away. Ultimately, accepting slightly higher price levels by raising central-bank targets will most likely result in both higher inflation and a weaker economy.
Amid pressing security and climate-related challenges, policymakers may be tempted to move the goalposts when it comes to price stability. For most of the past 15 years, developed economies struggled to generate inflation, with the US Federal Reserve and other central banks often falling short of their 2% target rates. But the COVID-19 pandemic, the escalating tensions between the United States and China, and Russia’s invasion of Ukraine have led to persistent supply-chain constraints, fundamentally altering the inflation landscape.