An unwarranted attack on inflation targeting

Gareth Stokes, FAnews Online Editor

South African journalists have long abandoned the principle of neutral reporting. The online media is particularly guilty of manipulating headlines to encourage readers to click through to a story and boost ratings. The result is hundreds of headlines that have nothing to do with content, and articles that blur fact in favour of sensation. An example of this ‘opportunistic’ reporting is the recent coverage of a presentation by Nobel Prize winning economist, Joseph Stiglitz. A mixed bag of television news, online news and newspapers commented on his 8 July 2009 speech at the University of the Witwatersrand.

Stiglitz used the platform to castigate governments and central banks for sticking with inflation targeting strategies through the recent economic crisis. His personal opinion is that this form of monetary intervention is too indirect. “I’m very strongly opposed to rigid inflation targeting,” said Stiglitz. What should readers take from the statement?

In search of a balanced view

Fin24 planted the first opinion-forming seed when it led with its “Stiglitz: SA must drop targets,” headline. And South Africa’s ‘free’ television news channels followed suit, claiming that a Nobel Prize winner had “condemned” the Reserve Bank’s inflation targeting policy. These media outlets are playing to the emotions of long-suffering consumers. They know that consumers will side with anyone who bashes the central bank’s apparent reluctance to cut interest rates to the bone. But in both cases the story content is way off the mark. Stiglitz wasn’t talking directly to South Africa’s monetary policy, but rather to economic policy in general.

For a more balanced view we turn to an article carried by Creamer Research Channel Africa. They say that Stiglitz was sharing his “stance” on inflation targeting. Stiglitz admitted to Creamer that he could not comment directly on the application of [inflation targeting] in South Africa! In other words, the link between Stiglitz and South Africa was assumed by sensation seeking journalists and consumed as fact by unwitting readers. All Stiglitz did, according to Creamer, was to state that he believed “rigid” inflation targeting contributed to the onset of the current economic crisis. He also questioned why central bank governors were obsessed with low consumer price inflation as “sufficient for economic stability.”

FAnews Online spent some time contemplating Stiglitz’s statements. How could he flag inflation targeting as exacerbating the economic crisis if only three of the 28 inflation targeting economies stuck to their guns during the first months of financial contagion? If the majority of countries abandoned inflation targeting policies at the first sign of trouble, then perhaps it is the failure of central banks to stick to their long-term monetary policy that is to blame!

Readers set the record straight

Turning back to the Fin24 article, the online news service alleges that “the South African Reserve Bank shocked the market last month when it announced that it would not cut interest rates…” It’s a strange comment coming in the wake of five successive interest rate cuts totalling 4% over a six month period. How could the Reserve Bank’s decision – based on a monetary policy stance that it has adhered to for more than a decade – come as a shock? Inflationary forces were creeping back into the domestic market with massive hikes in municipal rates, electricity and fuel. Under this scenario the Monetary Policy Committee had only two choices, to hike rates or to leave them unchanged!

We leave it to Fin24 readers to sort the fact from the fiction. One reader provided insight into the Nobel Prize winning economist. “Stiglitz goes around the world ‘preaching’ the same message to every country that targets inflation,” he said. There are many economic opinions that counter the anti-inflation target argument and “Stiglitz’s kind of social humanistic brand of economics is [just] one way to go.” Another Fin24 reader dismisses the article as little more than media hype: “I attended the talk and Stiglitz was not talking about SA specifically when he commented about inflation targeting.”

But we’ll allow Stiglitz the final word: “It’s not that I don’t care about inflation, but you need policies that will do something about the current economic situation [too].”

Editor’s thoughts:
We are not economists, but we believe the central bank’s monetary policy stance is admirable. The consistent application of the inflation targeting model has smoothed excessive volatility in the domestic economy and created a stable platform for all stakeholders. The central bank will not chop and change its proven policy at the whim of consumers or trade unions! Would you prefer a consistently applied inflation targeting policy, or should the central bank simply switch policies at the first sign of trouble? Add your comments below, or send them to gareth@fanews.co.za