[DEC] Inflation Targets in India

Question 1

What is meaning of trend inflation?

Answer 1

Trend inflation can be thought of as the rate of inflation that would be expected to prevail if there were no temporary factors, such as a level of economy activity below the economy’s potential, influencing the inflation rate. Put another way, trend inflation is the inflation rate that we would expect after temporary factors subside.

[INFLATION EXPECTED IN ABSENCE OF TEMPORARY FACTORS LIKE ECONOMIC ACTIVITY BELOW ECONOMY’S POTENTIAL]

Question 2

What is flexible inflation targeting?

Answer 2

Flexible inflation targeting is a monetary policy strategy used by Central Bank to maintain the price level within a certain range. This strategy indicates the importance of price stability as the prime factor of monetary policy. Inflation targeting is known to bring more stability, predictability, and transparency in deciding monetary policy. This is because of the argument that rising prices create uncertainties and adversely affect savings and investments.

[INFLATION TARGET EKA RANGE MADHE FINALIZE KARANE -> EX 2-6%]

Question 3

Effects of setting too high or too low targets?

Answer 3

A target set too below the trend imparts a deflationary bias to monetary policy.
A target that is fixed above-trend renders monetary policy too expansionary and prone to inflationary shocks and unanchored expectations.

[LOW TARGET = DEFLATION ; HIGH TARGET = INFLATION]