Professor Karl Whelan:

I have never been a fan of strict inflation targeting as it has been practised by central banks. In the European context, what it has always meant is that when inflation is above 2%, the European Central Bank, ECB, has had its hair on fire, so to speak, to try to get inflation down and when it is below 2% it has not always been as worried. The ECB has been more concerned in recent years following many years of being below target to at least be seen to be pursuing expansionary policy to meet its target. That is one of the issues. If people are thinking about what will happen to prices in the next number of years, if the inflation target is 2%, one would think prices will go up by 2% per year and in five years time, they will be up 10% effectively. With the way the ECB has implemented inflation targeting, it has not worked like that. Prices are up less than 10% and then it is hard to forecast how much of a shortfall there will be in that respect.

What we have seen recently with the Federal Reserve is that it has moved to what is called average inflation targeting, which is basically a commitment that if inflation is below its target of 2% for some period of time, it will then accept a period of inflation above 2% so that when it is averaged over, one gets 2%. That is closer to what economists would call price level targeting, making the price level predictable over time. I have always felt that is a better policy.

I would note the ECB's monetary policy strategy review. It spent 18 months reviewing its monetary policy strategy and announced with great fanfare the new strategy during the summer. It explicitly said that it is not its policy. It more or less has the Federal Reserve's old policy of targeting 2% inflation. Perhaps there are more strategy reviews to come and it will get it right the next time.