April 5, 2007

THOUGHTS ON INFLATION at The Economist:

It is possible to argue that inflation targets are unnecessary, provided that the central bank has a credible reputation as an inflation fighter. True enough, but inflation targeting gives bankers an instant measure of credibility, because markets know exactly what to expect. They also relieve bankers of some of the political pressure they inevitably receive to loosen up the money supply. . . .

Speaking of which, this recent piece from our Finance and Economics section highlights what happened back when central bankers did give into the political pressure to inflate the money supply: a little fast growth early on, and then a whole lot of misery later. In America, it took the deepest recession since the 1930’s to finally quiet inflation down again–and it’s really only now that American and British interest rates are finally settled back to their natural levels from the non-fiat currency days.

Inflation is highly damaging, and also highly tempting to governments that want to avoid short-term pain, or get rid of troublesome debt by inflating it away. Neither approach is worth it in the long run.

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