From New Zealand to New York, Inflation Targets Are So Passe

(Bloomberg Opinion) -- Paul Volcker rightly bemoans the prevalence of narrow inflation targets. Fear not, New Zealand is on the case. Sort of.

Volcker chafes that the 2 percent target adopted by many central banks hampers sound policy making. Giving too much credence to small deviations in consumer price indexes is a trap, he wrote in a Bloomberg Opinion column last week. (He’s also just published a book co-written with Bloomberg’s Christine Harper.)

The former Federal Reserve chairman is on strong ground as a matter of principle; 2 percent targets — or variations thereof — have become a sacrament and a problem. He is also correct to point to New Zealand as a kind of original sinner. The good news for Volcker and the world is that New Zealand has fallen out of love with the target. There’s a lesson there for places as diverse as Sweden, Japan and, to an extent, the U.S.

Timely reforms are underway that mean the Reserve Bank of New Zealand must focus on jobs as well as inflation. They also require interest rates to be set by a committee. This all seems like a no-brainer given the most powerful, the Fed, does the former and plenty practice the latter.

Yet tussles have broken out as New Zealand implements these overdue changes. The process has been less than transparent: There’s reluctance to publish votes and a spat over what the Treasury’s observer of the committee can and can’t say or do while on the premises (perhaps a blindfold and earplugs?).

“Help wanted” signs posted for the new committee’s external members said that no experience is required and that the chore wouldn’t be taxing — about 50 days a year. Hmmmm….

It’s easy to imagine who will end up running the show despite Finance Minister Grant Robertson’s efforts at change. The idea is that seasoned mandarins behind the scenes pull the strings.

At least the stated direction is right. The deification of numerical inflation targets, especially 2 percent, is getting in the way of practical decisions. Sweden is a great example. The country is enjoying its longest expansion since the 1980s, and inflation looks to be stabilizing around the hallowed 2 percent. But interest rates are negative! The Riksbank is talking about hiking, but you know there’s a problem if during a boom rates are still negative. (The Riksbank would counter by saying one reason growth is so strong is that rates are low.)

There may be a lesson for Japan as well. Inflation isn’t at the 2 percent target, and that locks the Bank of Japan into a kind of paralysis where officials can’t voice too loudly their very real achievements. Deflation is no longer present and Japan is no longer a euphemism for failure.

The slightest sign from the BOJ that it’s remotely satisfied with anything brings rampant speculation that the bank will shift away from easing. That has officials scurrying to quash that speculation, and so the cycle goes on. (I’ll have more to say about that in a coming column.)

Every era has its fashion. Decades ago, before high inflation was licked, a hard numerical target had its uses. New Zealand has cooled on the very thing it once trumpeted. Let’s hope the reforms are real and the message resonates.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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