What should central banks target? Since the early 1990s the answer has increasingly been “consumer price inflation”. But this has never been unchallenged. Today, there are four alternative positions. One thinks central banks should target asset prices. Another thinks they should target a “just” interest rate. Yet another thinks they should target real activity. The last thinks they should target some other nominal goal, such as the price level or nominal gross domestic product. These are important debates. But the reality remains: central banking is art, not science. The art must be guided by sensible goals coupled to deep awareness of uncertainty.

Since the early 1990s, the dominant view among central banks and economists is that the best target is inflation. The approach was pioneered in New Zealand in 1990 and quickly followed by Canada and the UK. The US Federal Reserve followed in 2012. The European Central Bank is also effectively an inflation targeter, though its target is a ceiling of 2 per cent and so not symmetrical. According to Paul Fisher of the Warwick Business School, 67 central banks had inflation targets in 2018.

The rationale for inflation targeting has three components. The first is that one instrument — in this case, monetary policy — can only be aimed at one goal. The second is that a central bank can only target a nominal goal of some kind. The third is that inflation is a comprehensible and politically acceptable aim.