NEW YORK – Price instability, both inflation and deflation, is a “significant source of financial instability,” Federal Reserve Bank of Philadelphia President and CEO Charles I. Plosser told an audience today.
“Pursuing sound monetary policy is fundamentally important to ensuring international financial stability,” Plosser told the 2009 Global Conference Series in Singapore, according to prepared text released by the Fed. “In the midst of the current financial crisis, we must remember that instability in the general level of prices — whether inflation or deflation — is itself a significant source of financial instability. Consequently, central banks around the world should ensure that they fulfill their unique responsibility to ensure price stability. Failure to ensure price stability, in my view, would certainly pose a major risk to international stability.”
Even changes in food and energy price, which are known to be volatile, can make life difficult for central bankers because they can change inflation expectations and “undermine the credibility of central banks’ commitment to price stability,” he said.
Consistent, transparent, and predictable systematic monetary policies “promote price stability, ensure credibility, and anchor expectations,” Plosser said.
Central banks need to communicate policy goals clearly, and, when necessary, why they have to deviate from those goals for awhile, “such as the impact of food price shocks on measured inflation,” he said. Bankers must also let the public know about policy actions that will keep inflation in check.
“I have found it encouraging that, despite large swings in food and energy prices in recent years, inflation expectations in most countries have remained quite well anchored,” he said. “I believe that the stability of inflation expectations in the face of wide swings in measured inflation reflects the benefits of a more systematic and transparent approach to monetary policy that many central banks have adopted. Such policies, as well as the adoption of explicit inflation targeting in more than 20 countries, have bolstered the credibility of central banks’ commitment to price stability. I believe that credible monetary policy also better positions a central bank to contain the risk that food or energy price shocks will alter inflation expectations or inflation itself.”
