Inflation targeting is a practice in which monetary authorities, acting as central banks, set
inflation targets for a certain period of time.
As of the end of 2021, there are 55 inflation-targeting countries in the world. Inflation is also targeted at the
Euro Area as a whole.
In most countries, central banks set targets for the level of
general inflation in annual terms, which shows the change in the level of consumer prices relative to the same period a year earlier.
Australia,
Canada,
Norway,
Russia,
Ukraine,
Kazakhstan,
Poland,
Zambia, and
India can be cited as examples of countries in which general inflation is targeted. Some countries, such as
Uganda, target the
core inflation rate in annual terms, reflecting the change in the level of consumer prices, excluding goods and services, confirmed by the influence of seasonality, compared with the same period of the previous year.
In the
United States, the
Federal Reserve System sets a target for the
Personal Consumption Expenditure Price Index, which analyzes price increases for a wide range of goods and services used by American consumers. In the Euro Area, the
European Central Bank (ECB) targets a
harmonized consumer price index, which, unlike the CPI, does not take imputed rent into account.
If inflation consistently exceeds the target, then this indicates an increase in inflationary expectations of the population, threatens
economic growth, the stability of the exchange rate, and the dynamics of market interest rates, and signals the need to raise the Central Bank rate to stabilize prices. If inflation is below the target, then this may serve as a signal about the need to reduce the rate or apply other measures of monetary policy to stimulate it.
The central bank can set an inflation target as a specific value - for example, in
Russia, where the
inflation target is at 4%, in the
Republic of Korea, the
United Kingdom, and the
United States with a target of 2%, or in
Iceland with a target of 2.5%. In a number of countries, central banks allow inflation to fluctuate within a certain range of values. For example, as of the end of 2021, this practice is applied in
Israel (the inflation target is 1-3%),
Uruguay (with a target of 3-7%),
Jamaica (with a target of 4-6%),
Turkey (3- 7%), and the
Czech Republic (1-3%). In
Switzerland and the Euro Area, central banks set inflation targets below a certain level (less than 2%).
The graph below shows how the inflation and refinancing rates have changed in some countries where inflation targeting is applied.
In September 2021,
Colombia’s inflation in annual terms was 4.51%, exceeding the target set at the level of 2-4%. In the
UK,
inflation also exceeded the 2% target at 3.1%.
At the beginning of each month,
Cbonds Group publishes Cbonds monthly research — Сountries with inflation targeting, which analyzes the compliance of inflation with target values, as well as the central bank rates in these countries. This study makes it possible to track both the current trends in global inflation and the dynamics of interest rates.