Some inflation is good, but it should be controlled, not allowed to run rampant and out of control. Central bankers want people to feel confident in the economy, their jobs, and their money. They don’t want “the irrational exuberance” that Alan Greenspan, then chairman of the U.S. Federal Reserve, famously attributed to the early days of the dot-com era, but simple confidence in the future.
Current Federal Reserve Chairman Ben Bernanke, President of the European Central Bank Jean-Cleade Trichet, and Masaaki Shirakawa, governor of the Bank of Japan, do not publicly subscribe to “inflation targeting.” However, they do outline a comfort level for inflation for their economic policies.
I see this as inflation targeting, but they don’t admit to it. In any case, a target or comfort zone gives the market participants a better understanding of how the central bankers will manage the economy. Bernanke is a big fan of inflation targeting, and he is fighting to make it an official policy. I believe that he’ll be successful and that the other bankers will follow suit in time.
The markets do not like surprises. The markets like certainty. The more transparent the banks, the more stable the economy ... or so the inflation-targeting philosophy goes.
For example, if the Federal Reserve Bank of the United States is targeting an annual inflation rate of 2 percent but the economic data shows an actual growth rate of prices at 3.8 percent, the Fed will need to do something ...