Editing Inflation (section)

=== Inflation targeting ===

{{Main|Inflation targeting}}
[[File:Federal Funds Rate (effective).svg|thumb|right|upright=1.6|The U.S. effective [[federal funds rate]] charted over fifty years]]

From its first inception in New Zealand in 1990, direct inflation targeting as a monetary policy strategy has spread to become prevalent among developed countries. The basic idea is that the central bank perpetually adjusts interest rates to steer the country's inflation rate towards its official target. Via the [[monetary transmission mechanism]] interest rate changes affect [[aggregate demand]] in various ways, causing output and employment to respond.<ref>{{cite web |title=Federal Reserve Board – Monetary Policy: What Are Its Goals? How Does It Work? |url=https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm |website=Board of Governors of the Federal Reserve System |access-date=17 September 2023 |language=en |date=July 29, 2021}}</ref> Changes in employment and unemployment rates affect wage setting, leading to larger or smaller wage increases, depending on the direction of the interest rate adjustment. A changed rate of wage increases will transmit into changes in [[pricing|price setting]] – i.e. a change in the inflation rate. The relation between (un)employment and inflation is known as the [[Phillips curve]].

In most [[OECD|OECD countries]], the inflation target is usually about 2% to 3% (in developing countries like [[Armenia]], the inflation target is higher, at around 4%).<ref>{{Cite web |title=Inflation Reports |url=https://www.cba.am/en/SitePages/mppubl.aspx |access-date=2022-12-06 |website=www.cba.am |archive-date=December 6, 2022 |archive-url=https://web.archive.org/web/20221206004614/https://www.cba.am/en/SitePages/mppubl.aspx |url-status=live }}</ref> Low (as opposed to zero or [[Deflation|negative]]) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a [[liquidity trap]] prevents monetary policy from stabilizing the economy.<ref name="econjournalwatch.org">{{Cite web |last=Hummel |first=Jeffrey Rogers |title=Death and Taxes, Including Inflation: the Public versus Economists |url=https://econjwatch.org/articles/death-and-taxes-including-inflation-the-public-versus-economists |access-date=2023-11-19 |website=econjwatch.org |publisher=Econ Journal Watch: inflation, deadweight loss, deficit, money, national debt, seigniorage, taxation, velocity |page=56}}</ref><ref name="aeaweb.org"/>