They do not want to raise the 2% target because it would damage their credibility, but a long period of not reaching it also affects
Central bankers spent the post-2008 decade worrying about deflation. They are now determined to limit the rise to around 2%, in line with their targets. Persistent inflation may force them to change targets.
Most central banks in the developed world define price stability as a 2% annual increase: low enough that most people don’t notice it, but still leaving some wiggle room before deflation. After 2008, economists worried that the targets would discourage policymakers from launching strong stimulus. In 2010, IMF economists argued that a higher target would give central banks more firepower to fight a recession.
Today, the monetary authorities are facing a rise in prices that they have not experienced since the early eighties. Although inflation was under control for several decades, the track record of central banks in reaching 2% is mixed. In the 1990s, inflation in the US as measured by the PCE index was equal to or less than 2% for only 49 of 120 months. Between 2000 and 2010, the target was met in barely a third of the months.
It would make more sense for them to set a higher inflation target range, allowing them to tolerate annual increases of 3%-4%. A World Labor Organization study on internet searches and networks suggests that most people don’t worry about inflation until it approaches 4%. A revised target would also allow for longer-term inflationary pressures such as trade frictions, the decline in the working-age population and climate change.
Central bankers claim that changing targets would damage their credibility. But prices are just coming down fast. All members of the Fed’s Open Market Committee expect inflation to remain above 2% in 2024. A prolonged period of missing the target also erodes credibility. Although they avoid saying it, the central bankers will soon have to start moving the inflationary goal posts.
