'Central banks should aim for higher inflation'

Central banks around the world need to join forces to raise their inflation target. This is what Adam Posen, who was active as a policymaker at the Bank of England, advocates. The former central banker said at a meeting of the ECB that a target of 2% inflation is not enough.

"The 2% target, which I advocated forty years ago, is no longer useful. No central bank can do it alone. The stubbornly low inflation, the danger of a lower bound and the credibility problem of not achieving the target means that we need to set a more ambitious target."

Striving for more inflation

The inflation that central banks are looking at has been stubbornly low for years, despite all the monetary stimulus. Central banks are struggling with this issue because their policies are not delivering the desired results. It is also striking that unemployment is low in many Western countries, but that wages are hardly rising in the meantime.

According to the central bank handbook, a tight labour market means that wages rise, which should also have an effect on prices in the long run. But the figures show that wages have been rising for a long time. remain, which also puts pressure on purchasing power.

More stimulation?

Posen did not give a concrete number for the inflation that central banks should be aiming for. It is an issue that several central banks are facing. Considering it, but on which opinions differ. At the Federal Reserve, there are already voices to allow higher inflation, while ECB President Draghi sees no reason to adjust the inflation target for the time being.

The U.S. central bank could raise interest rates lower to boost inflation, but it remains to be seen whether this will bring the central bank closer to its target. The biggest problem is that monetary policy has actually created more inequality, which means that the purchasing power of a large group of people is lagging behind.

It is therefore no coincidence that governments are increasingly being looked to to strengthen the purchasing power of the population. With fiscal stimulus, more money will end up in the hands of the population, which will cause prices to rise faster. Yet it is also a dangerous experiment, because central banks can lose control of inflation. Central banks must therefore be extremely careful about what they want.