Last resort

13 December 2012 By Agnes T. Crane

Central banks in developed economies have been trying to juice the economy for years, without much success. As they run out of fresh ideas to battle the doldrums in 2013, they may reluctantly decide that debt-melting price increases are the least bad way forward.

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The Federal Reserve formally adopted an inflation target of 2 percent in 2012. It is now considering the addition of unemployment and inflation thresholds to better guide investor expectations on the timing of its next rate hike.
Chicago Fed President Charles Evans and Minneapolis Fed chief Narayana Kocherlakota said they would allow inflation to rise above 2 percent in an effort to get the unemployment rate down.
U.S. Inflation, as measured by the personal consumption expenditures (PCE) price index has averaged 2 percent over the last three years, according to Fed Chairman Ben Bernanke.
The Bank of Japan set an inflation target for the first time in February 2012. Shinzo Abe of the Liberal Democratic Party, however, wants the central bank to double that threshold. Japan has been experiencing deflation since 1998.
In a 2010 paper titled “Rethinking Macroeconomic Policy,” International Monetary Fund chief economist Oliver Blanchard wrote that central banks should consider raising their inflation target to 4 percent from 2 percent, to give them greater flexibility in conducting monetary policy.

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