IMF Says Inflation Targets Should Exclude Food, Energy Prices

The International Monetary Fund said central banks should focus on measures of inflation that exclude food and energy in their efforts to keep the cost of living under control.

Central banks “should set and communicate monetary policy based on developments in underlying inflation,” which it said reflects trends that are “likely to be sustained over the medium term,” the Washington-based IMF said in a chapter of its World Economic Outlook released today.

The European Central Bank has an inflation “goal” of just under 2 percent, and the Bank of England and Bank of Canada both have targets of 2 percent. The Bank of Canada also uses core inflation as an “operational guide” that gives policy makers a sense of price trends. While the Federal Reserve doesn’t have a formal target, policy makers say they seek to keep inflation at 1.7 percent to 2 percent in the long term.

Central banks around the world are contending with rising food and energy prices, which the IMF said pose a greater threat to developing nations, where food accounts for a larger portion of household budgets. Fed Chairman Ben S. Bernanke, in a speech on Sept. 8, said inflation is likely to moderate as the “transitory” influence of higher food and gasoline prices wanes.

“Because shocks to commodity price inflation are typically beyond the control of policy makers, hard to predict, and often not sustained, central banks seeking to establish credibility are generally better off setting and communicating their monetary policy in terms of underlying inflation rather than headline inflation,” the IMF said.

Subject of Debate

The Fed’s focus on so-called core inflation has been a subject of debate among policy makers. Federal Reserve Bank of St. Louis President James Bullard this year has argued for an inflation target that includes food and energy, lest it “create the appearance of avoiding responsibility for inflation.”

Particularly in developing economies, a target on overall inflation can damage the credibility of the central bank when prices of commodities result in gains above the target, the IMF said.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net.

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net