Wednesday, February 17, 2010

CPI Inflation Targets in UK

Yesterday, the ONS reported that CPI inflation jumped to 3.5% in Jan. This record jump was partly influenced by the impact of rising VAT from 15% to 17.5%.

But, stripping away temporary factors, is an inflation rate of 3% good news or bad news? A little inflation is much better than the threat of deflation

Around the world, Central Banks have an inflation target of 2%. But, the costs of having an inflation rate of 3% are only marginally higher. A higher inflation rate would enable higher nominal interest rates and thus give Central Banks more manoeuvrability in cutting interest rates in the case of a slump we witnessed recently.

More analysis at - Optimal Inflation Rate

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