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From Ottawa to Oslo, policymakers have questioned whether this level of consumer price growth, a holy grail for the world's major central banks over the last 25 years, is still in the news.
According to some economists, the 2% target was still an arbitrary figure, and even if it was optimal two decades ago, this is no longer the case, given the profound changes that have since changed the global economy.
The problem is that the rate of inflation would not be better. According to a survey released last year by Anthony M. Diercks, an economist at the Federal Reserve, dozens of academic studies on this issue have produced responses ranging from 6% to less than zero. If we generally consider that deflation, or the steady decline in prices, weighs on economic growth, a slightly negative inflation rate would also have benefits, such as eliminating the cost of holding of cash.
The debate has grown since former Federal Reserve Chairman Janet Yellen suggested last year that the US central bank revises its 2% inflation target. . Canadian officials also indicated that they may be willing to change the Bank of Canada's 2% target when its mandate is reviewed in 2021.
Recently, economists have tended to ask for a higher goal. The main argument is that this would give central banks more leeway to fight economic downturns, as higher inflation implies higher interest rates, which leaves more room for maneuver at home. the Fed.
"No matter [inflation] the rate was deemed optimal in 2006 or before is now too low, "says Olivier Blanchard, a researcher at the Peterson Institute for International Economics in Washington, DC, who asked for a 4% goal.
Factors such as an aging population, sluggish economic growth and higher savings rates are helping to drive down the neutral interest rate at which the economy is growing at a steady pace over the long term and inflation is stable . As a result, central banks are at greater risk of taking reference interest rates at zero or below as they seek to support growth.
And yet, the Norwegian government recently said it would reduce its central bank's inflation target to 2.5% from 2%, saying there was no reason to rule out international standards. With inflation close to the target, the central bank raised interest rates to 0.75% on 20 September.
The case for a higher goal is that policymakers have a hard time reducing benchmark interest rates well below zero. If inflation is 2%, it means that central banks can reduce the real interest rate – the benchmark rate minus inflation – to minus 2% by lowering the benchmark rate to zero. If inflation were higher, say 4%, reducing the reference rate to zero would reduce the inflation-adjusted rate to minus 4%, which would give an extra boost to the economy. .
Higher inflation could have other benefits. This could help economies adjust after an economic downturn by reducing the need for direct wage cuts, as rising prices will erode wages anyway. It could also help borrowers repay their debts, although in the past, lenders have always resisted. A 2009 study estimated that US inflation of 6% for four years could reduce the country's debt-to-GDP ratio by about 20 percentage points, as it did after the Second World War.
Other economists have questioned the fact that this level of inflation would reduce the debt ratio. And many worry that central banks would struggle to push inflation to 6% in the near future, given the difficulty of reaching 2%.
Vítor Constâncio, vice president of the European Central Bank in May, said at the time that there was "no theoretical objection" to a "light" upward revision of the 39, goal of inflation, the shift to a new goal gained credibility.
The ECB is part of a group of central banks that have reduced their benchmark interest rates below zero, a new measure to boost their economies. Former Fed Chairman Ben Bernanke suggested that negative rates could be a better alternative to higher inflation targets.
"Yes, negative interest rates raise a variety of practical problems, as well as political and communication problems, but the same is true for a higher inflation target," Bernanke wrote. in a 2016 post. "Politically, the fact that negative rates would be temporary and deployed only in harsh economic conditions would be an advantage."
Higher inflation may have disadvantages, as many economies have learned through a painful experience. This could distort the tax system and mask economic signals, for example if product prices rise because they are scarce. According to economic economist Michael Schubert, banks could demand an inflation risk premium when granting long-term loans.
Commerzbank
in Frankfurt. Thus, financing would become more expensive, leading companies to invest less.
Crucially, an inflation rate of 2% allows households and businesses to ignore price increases. This effect could be lost if inflation is allowed to rise much higher.
"We know that inflation rates in excess of 2% to 3% will be a significant part of decision-making because we have a lot of experience with higher inflation rates," says Guy Debelle, vice-governor of Australia. bank. "But how much higher, we do not really know exactly."
One possible solution: central banks could allow inflation to rise slightly above 2% without trying to reduce it aggressively. This could give them more leeway and gradually inflate the planet's huge debt load.
It seems that this is already happening in the United States, where inflation in August was 2.7%. The Fed has raised rates, but gradually, and does not seem to have to accelerate its pace.
Although euro area inflation has accelerated in recent months and is now at 2%, the ECB has indicated that it will not raise rates for about a year.
Joseph Gagnon, a member of the Peterson Institute, says the Fed "should steer the policy towards a surpassing, not for itself, but to avoid" ironing "its target in the future.
Mr. Fairless is a Wall Street Journal reporter in Frankfurt. Email: [email protected].
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