High and fluctuating inflation, on the other hand, disrupts the signalling function of the pricing system and can more easily lead to bad economic decisions. In an environment with low inflation, the price system can do a better job in allocating resources to uses where they will do most good. In a broader sense, one could see an efficient pricing system as part of an efficient payment system – it ensures that the transactions made are based on the best information possible. Price stability can also be justified for reasons not immediately connected with the efficiency of the payment system, such as the fact that high and fluctuating inflation tends to give rise to undesirable distribution effects. For instance, inflation appears to hit poor people hardest as the rich usually have better opportunities to protect themselves, or even to benefit, from the effects of inflation 2 . This could be because, for instance, poor people often have no other opportunity than to retain a large part of their limited assets in the form of money or because they are to a greater extent than the rich dependent on public subsidies that are not fully indexed. Keeping inflation low and stable is currently the most obvious – and definitely the most noticed – task for modern central banks. The reason for the focus on price stability is of course the negative experiences of the high and fluctuating inflation many countries experienced in the 1970s and 1980s.
This was the case with the Swedish krona and several other European currencies at the beginning of the 1990s. With regard to inflation targeting, I am of course somewhat biased and for obvious reasons find it easier to point to advantages than disadvantages. One advantage is that a central bank which conducts inflation targeting is not tied to maintaining a particular exchange rate relationship, but can be more directly aimed at focussing on what is happening in the domestic economy. Another, partly related advantage – which I believe has been very important in Sweden’s case – is that inflation targeting means that one specific authority is given a clear responsibility for maintaining price stability. During the 1970s and 1980s it was not entirely clear where the responsibility for this lay in Sweden. One could say that the responsibility in practice had been delegated to the social partners, but that the total economic policy tended at the same time to be so expansionary that it became difficult to maintain wage and price increases at reasonable levels. A further advantage of inflation targeting is that the task of monetary policy, in the same way as with a fixed exchange rate regime, is easy for the general public to understand. If I am to try to find a disadvantage with inflation targeting, it could be that it is more difficult from a purely operational point of view for a central bank to steer inflation towards a particular level than to maintain a particular exchange rate relationship.