Misery Loves Inflation Targeters’ Company
Inflation targeting is a means to an end – to facilitate full employment and higher GDP growth – and, at least in Japan, substantial progress has been made toward achieving it. So, if faster price growth, like higher unemployment, implies economic and social costs, why should the Bank of Japan remain obsessed with bringing it about?
TOKYO – The United States, Europe, and Japan are all making positive economic strides. In the US, the unemployment rate is falling, and now stands at just over 4%. Unemployment remains high in the eurozone, at close to 9%, but that still represents significant progress from the past decade or so. And Japan has achieved virtually full employment, with labor demand so high that new graduates are able not just to find jobs, but to choose them.
Yet there is one key area where progress seems to be lagging: inflation. While the US consumer price index reached 2.2% in October, the European Central Bank and the Bank of Japan have so far been unable to meet their targets of roughly 2% inflation, with the eurozone’s average annual price growth hovering around 1.5% and Japan’s firmly lodged in the 1% range.
There are good reasons to strive to meet the inflation target. Money markets would be rid of near-zero interest rates. Concerns about currency appreciation damaging export competitiveness would be assuaged, as globalization and artificial intelligence continue to create competition for workers. And the expansionary monetary policy pursued by the world’s major central banks in recent years would be vindicated.