Inflation is the marked change in the value of the currency of the period of time in regard to the consumer price index it is “the rise in price of goods and services, or Consumer Price Index (CPI), when too much money chases too few goods on the market. Moderate inflation is a result of economic growth. Hyperinflation (rising at rates of 100% or more annually) causes people to lose confidence in their economy and put their money in hard assets such as gold and real estate.” (‘Inflation – Definition’, 2004). Target inflation on the other hand is the inflation range supported and chosen by the government as part of its monetary policy. This is a preferred range which is deemed mandatory pr required for a company to keep on increasing its level of the economy, GDP and the stand of Living. Usually, a standard target inflation rate is between 2-3 percent. The different advantages associated with inflation can pertain to the fact that when inflation takes place the number of units of the currency increase while the value of the currency, on the whole, remains the same. This results in the value of the currency per unit decreasing. Due to this effect, one of the main advantages of inflation is that in the country where inflation is taking place the population of the country may feel as if it is getting rich. However, this is an illusion due a large number of monetary units floated and being traded on the market. Aside from this in the case where a loan may have been taken out by a party, the borrower is benefited in the event of inflation as the number of units to be repaid by the borrower remains the same while the worth or the value of the units decreases resulting in a loss for the lender. Moreover, it is also possible that the increase in inflation can also take place due to the extra growth in the economy or increased productivity which leads to an increase in the money being traded in the market and a consequence of relatively a low inflation rate. Another advantage of inflation is that if and when the prices increase, the currency is devalued which results in a possible consequent growth in the public sector. The disadvantages of inflation pertain to the fact that in the case of loans being taken out the lenders tend to lose money due to the devaluing of a single monetary unit. Aside from this people who have signed labor contracts tend to see an increase in their real wage which is their purchase parity. Moreover, in the event of inflation and the increase in the prices of commodities in the market, the pressure is put on interest rates which tend to increase resulting in a benefit for those people investing with the government. In the overall scenario with the presence of inflation, the capital income of the country tends to decrease which can result in tampering of the monetary value of the country’s currency. Hyper-intensive hardship tends to increase and the poor people become poorer while the rich people become richer resulting in a larger gap between the haves and the have nots. Inflation also begets inflation while simultaneously harvesting corruption in the region. The concept of inflation targeting is used by the European Union and the European central banks to control the prices by stabilizing them. With targeted inflation the central bank becomes independent from the government and the fiscal surpluses are correlated with the adoption of inflation targeting. Those investment banks which use inflation targeting call themselves inflation targeters. “Moreover, many central banks that have not formally adopted the framework of inflation targeting have clearly been influenced by the approach (or, if you prefer, the same ideas and trends have influenced both inflation-targeters and non-inflation-targeters). For example, over the past twenty years, the Federal Reserve, though rejecting the inflation-targeting label, has greatly increased its credibility for maintaining low and stable inflation, has become more proactive in heading off inflationary pressures, and has worked hard to improve the transparency of its policymaking process–all hallmarks of the inflation-targeting approach.” (Bernanke, 2003)
There exist many misconceptions pertaining to inflation targeting. These include:
- Inflation targeting makes use of mechanical policymaking. This does not stand true as if the policy has to be effective it has to bear and conform to a preexisting framework. Inflation targeting does propose a monetary policy but it is only used when the inflation targeting is effective and beneficial over a long period of time. Otherwise, the this policy as well has to be scrutinized in detail
- Inflation targeting is basically about controlling inflation while not taking into account the product, output, and employment issues. This again does not stand true as there exists a strict form of inflation targeting and flexible inflation targeting. Most central banks and governments are in favor of flexible inflation targeting as it tens to take into account issues pertaining o employment of the people and productivity of the country
- Inflation targeting is not consistent with the objectives of the central banks which pertain to marinating stability in the financial and monetary sector. This gain is not true as inflation targeting is specifically used to reduce the variations in the price and promote stability in the prices. As a result, the process and the consequence of inflation targeting is intoned and relevant to the objectives and goals of the central banks and the government who strive for stabilizing the prices in the country
However, this does need to be realized that even inflation targeting exists in the economy with its own set of limitation and as result is not a perfect solution for stabilizing prices and countering inflation.