Looking under the hood: The two faces of inflation by Claudio Borio, Piti Disyatat, Dora Xia, Egon Zakrajšek published by VOXEU (1/2022)
High and low inflation are two very different animals. This column argues that after remaining low and stable for a prolonged period, what we measure as inflation is in fact largely an average of idiosyncratic (relative) price changes and not inflation in the theoretical sense of a generalised increase in prices. What’s more, these idiosyncratic price changes tend to be transitory or stable, so that there is a certain tendency for measured inflation to remain range-bound at a low level. The evidence also indicates that, in such an environment, monetary policy operates through a remarkably narrow set of prices. These findings suggest that, under those conditions, it may be difficult and undesirable to follow very tightly defined inflation targets. Having done the hard job of bringing inflation down, central banks can enjoy the fruits of their labours, although at the same time they need to make sure that those fruits are not ephemeral.
