Learning from the inflationary mistakes of the past

As usual, inflation targeting began in the United States. In 1971, the US cut the link between the dollar and the Gold. Soon other countries followed suit. Inflation started rising to unprecedented levels in the US and the other industrial nations. Like in today’s India, the inflation of the 70’s was blamed on the rising oil prices, and various external factors.  Like in today’s India, many economists had believed that with rising inflation unemployment would fall. Low growth was also associated with high inflation. But, in the 70s, with high inflation, growth fell and unemployment rose.

In 1979, the Fed decided to have monthly target rates for the growth rate of M1. (M1 consists of the public’s holdings of currency and the checking account deposits in banks and other depository institutions) In 1971-81 period, the inflation in the US was in double digits, but, something changed after that.For close to three decades, inflation in the US was steady, but historically low. Fluctuations were mild till the ongoing global slow down. This is historically unprecedented. In the 70’s and 80’s, inflation in New Zealand was higher than in other OECD countries. In 1988, the CPI inflation in New Zealand was 9%. Inflation targeting began in 1990, and by 1991, the inflation was down to 2%. Inflation and output volatility declined. By 1994, New Zealand was among the fastest growing OECD countries.  In the financial year 2012-13, prices fell in New Zealand, month after month. It was so remarkably successful.

Read the whole article in the Business Standard.