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What is Inflationary Bias?

2017-06-09T07:06:09+00:00

The term 'Inflationary Bias' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Inflationary Bias refers to the opposite of deflationary bias. Both of these are government monetary and/or fiscal policy prejudices. Governments are forced to take one of two positions with reference to their monetary policy and interventions in an economy. Inflationary bias turns out to be the one which the vast majority of central banks and sovereign nation policy makers pursue for several important reasons.

Such an Inflationary Bias results from discretionary policies of national governments. If they are utilized properly with regards to the labor market, these biases cause a higher than ideal inflation level without leading to any transitions in income increases. At the same time, this bias results from the goals of those nations which are saddled with public debt levels. They would pursue these policies with a goal of fostering inflation over the medium to longer term.

There are economic theories that persuasively argue governments have a natural affinity for and tendency towards Inflationary Bias policies. The Barro-Gordon model demonstrates that the government’s ability to manipulate the economy will cause it to skew towards a bias that is inflationary by nature. According to such a model, countries will try to maintain the country’s national unemployment rates at lower than the naturally occurring levels. This causes a wage and price inflation that is higher than their normally occurring level. In the end, this will lead to an aggregate inflationary level that proves to be greater than the normal level of inflation.

The economic theories that are more traditional also suggest that this Inflationary Bias will be present any time that fiscal and monetary policies become enacted at the discretion of the policy makers and central bankers instead of being rules based. Still other economists argue that this bias will even be present if the policy makers are not bent on reducing unemployment to lower than normal levels and even if the policies operate off of rules instead.

As there are so many perils from such Inflationary Biases, economists have suggested a variety of measures to stop it from occurring. Some of them have argued for appointing only conservatively ideological central bankers. According to these arguments, the countries ought to set out aimed for inflationary targets and goals. When these rates of inflation are surpassed by real economic data releases, there could be a punishment of some type given out to the central bankers.

In truth and point of fact, the majority of important countries now do state their optimal inflation rate targets in their policy setting meetings, press conferences, and notes from closed door meetings alike. For most Western nation policy makers and central banks like the United States Federal Reserve, Great Britain’s Bank of England, the Euro Zone’s European Central Bank, and the Japanese Central Bank, this level amounts to a desired two percent inflation target over the medium to long term time frame.

For those nations that opt to go with the opposite of an inflationary bias, the only other choice is the deflationary bias. The problem with deflationary biases is that they only work for countries, businesses, and consumers which are not saddled down with enormous debt levels. This is because a deflationary bias will cause debts to progressively cost more in real terms over time even as they reward savers and creditors. Governments are especially afraid of this policy bias as they are mostly running budgetary deficits year in and year out. Only a handful of countries run government budget surpluses in point of fact.

The term 'Inflationary Bias' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.