The Annual Inflation Rate and Inflation Targeting: A Different Perspective

Central banks use annual inflation-targeting regimes to achieve and maintain price stability. However, the annual inflation rate, considered as a moving average filter of the annualized inflation rate, shows undesirable statistical characteristics, namely the time delay and spurious cycles. The source of the cyclical process are the jumps and the seasonality in the ln CPI and, subsequently, that of the annualized inflation rate. Therefore, the annual inflation cycles cannot be directly influenced and adjusted, and the commonly pursued inflation-targeting policies are ineffective. Another area for improvement is methodological. The banking authorities target the slope estimate of the linear deterministic CPI trend model, but they should target the slope parameter. But this approach also has weak points.