After all, monetary policy is complicated by the fact that inflation reacts to the central bank’s interest rate decisions with long and varied lags. Actual inflation rates are therefore not cut out to be a gauge of monetary conditions.
The central bank should focus on information which provides insight into future inflation, and possibly formulate a number of intermediate objectives, the so-termed intermediate target variables: in Europe today the money supply and the exchange rate often figure as such. The exchange rate in particular plays a major role in open economies, where inflation is due largely to external factors.