Update on 4% Inflation Target

As noted last week, IMF economists have suggested monetary authorities consider raising the inflation target from 2 to 4 percent. Unsurprisingly, the ECB is not so keen.

“I can only reject the idea of raising inflation rates permanently,” ECB Executive Board member Juergen Stark said in a speech in Seoul today. Bundesbank President Axel Weber wrote...that the Washington-based lender is “playing with fire..Weber, a contender to succeed ECB President Jean-Claude Trichet next year, said...that faster inflation causes “more damage than good” and warned the IMF’s discussion threatens to undermine the credibility of central banks. [ECB] Executive Board member Lorenzo Bini Smaghi yesterday said the proposal ...[was] “backward looking.” Cypriot central banker Athanasios Orphanides ...called the proposition “counter-productive” ... as it may weaken the “hard-fought achievement” of anchoring inflation expectations.

Bernanke is more circumspect:

"Asked about the study by U.S. lawmakers yesterday, Federal Reserve Chairman Ben S. Bernanke said while he understood “the argument and it’s not without its appeal” it carries “certain risks.” “If the Federal Reserve says we’re going to raise inflation to 4 percent, how do we know that later it won’t go to 5 or 6 or 7 percent?”