Many central banks use ‘inflation targeting’. Their principal aim is to achieve a particular annual rate of inflation within an acceptable range. For example, they might aim for a 2% rate of inflation but will accept a rate between 1% and 3%. Some economists claim that inflation targeting will help reduce the actual rate of inflation. The Central Bank of Turkey uses this approach and Table 5.1 shows how well it has worked.

In 2008 Turkey faced two particular difficulties. The New Turkish Lira (TRY) depreciated by 30% and food prices rose because of drought. Within the Turkish Consumer Price Index, food has a high weighting of 31%.How successful five countries were in controlling inflation in 2008 is shown in Figure 5.4.

a. (i) In which year was Turkey most successful in meeting its inflation target?
(ii) In which year was Turkey least successful in meeting its inflation target?

b. Explain the likely effect of the depreciation of the New Turkish Lira on Turkey’s rate of inflation.

c. With reference to Figure 5.4, how might differences between the inflation targets and actual inflation rates in Chile and Brazil in 2008 be explained?

d. How might having a target for inflation affect the causes of inflation?

e. Discuss the possible problems of constructing an accurate consumer price index.

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2003 2004 2005 2006 2007 2008 Target 20 rate 8 12 5 4 4 Actual 18.4 9.3 7.7 9.7 8.4 10.8 rate Table 5.1 Inflation in Turkey 2003-2008 (annual % rate)