INFLATION TARGETS
A radical central banking policy adopted by New Zealand initially in 1989 that revolves around meeting preset, publicly displayed targets for the annual rate of inflation, is more commonly known as inflation targeting. This policy was adopted later on most notably by countries like Chile, Canada, Israel, Sweden, Finland (Pre- Eurozone), Spain (Pre-Eurozone), Australia, Brazil, Mexico, England and South Africa. The benchmark used for inflation targeting is typically a price index of a basket of consumer goods, such as the Consumer Price Index (CPI) in the United States. Along with inflation target rates and calendar dates to be used as performance measures, an inflation targeting policy may also have established steps that are to be taken depending on how much the actual inflation rate varies from the targeted level, such as cutting lending rates or adding liquidity to the economy.
It is arguable that the Federal Reserve is not explicitly following inflation targeting. After all, the Fed stated it was serious about its new 2% inflation target when announced in January 2012:
“The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.”
Given that the Fed is following a policy of inflation targeting (Figure 1 illustrates how Fed’s inflation