PARIS -- Many central bankers have been singing the praises of inflation targeting as a way to guarantee stable price levels and bring about sustained economic growth. For its part, the Bank of England helped pioneer inflation targeting and is credited with successfully holding deviations within 1 percentage point from above or below a target rate of 2.5 percent.
Support for setting inflation targets comes from a belief that, when central banks stabilize price levels, market mechanisms will operate better. Since a stable price level allows buyers and sellers to see changes in relative prices, resources can be allocated more efficiently and economic growth promoted. When increases in the price level are unexpected, it is more difficult to distinguish between relative price changes and changes in prices due to changes in the price level.
This logic suggests that increases in the price level -- if they are stable and predictable -- are acceptable. This approach to price stability does not require central banks to oversee low rates of price increases; they must ensure only that rises or falls in the general price level can be anticipated.