Inflation Targeting

Business, Legal & Accounting Glossary

Definition: Inflation Targeting




Full Definition of Inflation Targeting


Inflation targeting is a policy followed by central banks that involve completing predetermined, public economic targets for the annual rate of inflation. The central bank aims to contain inflation in a particular target range. This is generally achieved by tweaking interest rates. The underlying concept is that since inflation is affected by growth in money supply, an increase or decrease in interest rates will increase or decrease the supply of money and thus inflation will be affected. It is to be noted that the inflation rate and interest rates are inversely related.

Central banks habitually take a series of steps to meet inflation targets. List of steps includes bringing down lending rates. Increasing liquidity in a country’s economy also helps to reach inflation targets.

Central Bank

A central bank is a commercial entity responsible for supervising monetary system of a country. Central banks play a wide role- from maintaining the stability of currency to ensuring full employment and low inflation. They may also issue currency and manage exchange reserves. Central banks also act as a lender of last resort.

Speculative Bubble

A speculative bubble is a sudden increase in the value of assets in a specific industry, asset class or commodities. A speculative bubble is caused by amplified expectations of appreciation in price and future growth. Values of assets are increased. This catalyzes a considerable rise in trade volumes. The number of buyers becomes greater than sellers and forces prices above the intrinsic value of that asset.

A bubble is deemed to be completed when prices retrograde to normal levels. A speculative bubble is also known as ‘market bubble’ or ‘price bubble’.

Trend

A trend is explained as the general direction of asset price or market. Trends may be long term, short term or intermediate-term. Stock market investors tend to ride a trend to maximize monetary profits. A trend may also be applicable in other financial arenas like interest rates and yields.


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Definition Sources


Definitions for Inflation Targeting are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 27th March, 2020 | 2 Views.