Although all monetary policy frameworks should be forward looking, inflation targeting relies heavily on forecasts. Where inaccurate forecasts are made public it can obscure the central bank’s objectives and reduce its credibility. Compared with other monetary policy frameworks there is also the risk that inflation targeting could lead to inefficient output stabilisation.
This can occur particularly in the event of significant supply shocks, such as sharp changes in the price of oil. Preconditions for inflation targeting In view of these potential disadvantages of inflation targeting, it is important that certain preconditions are met before a decision is taken to implement this framework.