What is the inflation target and why is it set?
The inflation target is the quantitative objective set by Banco de la República to fulfill its constitutional mandate of preserving the purchasing power of money through low and stable inflation. The Bank sets a target to keep inflation close to that level and to guide its decisions regarding the policy interest rate. It is also set so that the public is aware of it, can anticipate the Bank’s actions, and make consumption, investment, pricing, and wage decisions consistent with this target. Additionally, by having a pre-established target, the Bank can compare it with observed inflation at any given time and explain its decisions to the public.
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The Inflation Target and its Importance for Price Stability
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Inflation is the generalized and sustained increase in the prices of goods and services. When inflation is high, money loses its value rapidly, which affects all sectors of the economy, especially households, as their purchasing power declines. This means that with the same amount of money, a household can buy fewer basic goods such as food, and access fewer services such as transportation and rent. Additionally, when inflation is not only high but also volatile, it hinders the financing of long-term projects that require a significant investment of resources such as education, entrepreneurship, and home purchases....
