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"Central Banks' 2% Inflation Target Under Scrutiny Post-Pandemic

Top central bankers credit the 2% inflation target with anchoring decades of stable prices. However, this approach to monetary policy is being tested as prices have erupted and the economies intensify damage.

Central bankers believe that by announcing an inflation goal, they build credibility and help keep inflation controlled. The use of inflation targeting spread across the developed world from New Zealand in 1990 to Europe, the US, and Japan in 2012 and 2013. During that time, inflation was largely contained, due to globalization, technology, and demographics.

However, the pandemic and Russia's invasion of Ukraine have created supply shocks, pushing prices in the opposite direction and challenging the shared monetary policy framework. Claudio Boric, head of the monetary and economic department at the Bank for International Settlements, said that there may be a period of structurally higher inflation compared to the past two decades due to global trade, climate transition, demographics, and politics. Despite these concerns, Boric and other top policymakers do not favor increasing the inflation targets.

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