Fed is not an inflation targeting central bank but there are enough papers debating the issue. It was quite a debate before the crisis.
Now, when we talk about inflation targeting we get into macro ideas – how does it work, how it leads to lower inflation, how it makes central bank more independent and transparent etc. The questions don’t look at a major issue- what measure of inflation should be targeted?
Justin Yifu Lin and Célestin Monga of World Bank write an excellent paper on the topic.
Here is some background before I discuss the paper.
WPI index increased from 253.7 in April ’10 to 258.1 in May ‘10. This implied inflation for May ’10 at 10.16% (YoY), higher than market expectations of 9.43% (as per several polls).
Inflation was higher as market participants expected a lower figure for the manufactured products sub-sector (explained below). For March ’10, inflation was revised upwards from 9.9% to 11.04%. Once again inflation has been revised upwards significantly.
IIP for April 2010 was at 17.6% (y-o-y). It was much higher than market expectations of 13.8% (as per different newswires). The figure for March was revised upwards from 13.5% to 13.9%.
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