Are Our Inflation Targets Too High?

David Laidler, once a champion of the 2% inflation target in Canada, is now revising his policy recommendation. In a recent report published by the C.D. Howe Institute, Laidler says,

... [T]he current 2 percent CPI inflation target was initially

conceived as a transitional step on the path to something called price stability, and has only by default acquired an aura of permanence. The current regime might embody the best way of running the country’s monetary policy, or at least close to it, but perhaps it does not, considering the corrosive effect of even 2 percent inflation on the purchasing power of money .... It would be wise to have some systematic and serious discussion of the question.

How much lower should the target be? Laidler hints at a 1% target, and discusses some of the problems with lowering the target that much.



Here is another problem he doesn't deal with: my own guess is that, given the known upward bias of between 1% and 1.5% to the CPI, the Bank of Canada would be well-advised to re-target the rate of inflation no lower than 1.5%. He seems to reject a non-integer percentage as an inflation targe, saying,

Given the practical need to work in round numbers to maintain policy transparency, 1 percent does seem to be the next feasible stopping point below 2 percent.

But I do not agree. The Bank of Canada could publicly and transparently announce an inflation target of "1.5% per year, not to exceed 2% and not to fall below 1% per year." Quickly the target would become a range (as, in fact, it is now), and the targetted range would be between two "whole numbers".



This nit-pick aside, Laidler is right. A 2% inflation target has worked but is too high. It should be eased downward.