piti disyatat : targeting inflation ( more ) flexibly remarks by mr piti disyatat, deputy governor of the bank of thailand, at the annual conference of the financial street forum 2024, beijing, 18 october 2024. * * * distinguished leaders, ladies and gentlemen, it is an absolute pleasure to participate here today at the financial street forum. i would like to thank the organizers, in particular the people's bank of china for inviting me. the last time i was in beijing was in 1995 where i spent most of my time exploring this historic city on bicycle. the transformation to this modern metropolis has been remarkable and is a testament to the visionary and adaptable leadership that has guided china's unparalleled economic development. over the last 30 years, monetary policy has also transformed with inflation targeting becoming the most widely - used framework in the world. by most measures, inflation targeting has been a resounding success. countries that have adopted inflation targeting have, on the whole, seen marked reductions in the level and volatility of inflation along with smaller output fluctuations. it has withstood big upheavals, including the gfc and the covid pandemic. and some 35 years on, inflation targeting has passed the " no - regret " test in that no country that has adopted it has abandoned it. even so, maintaining success going forward requires that the framework adjusts in a way that recognize key limitations and challenges that are likely to emerge. in my remarks today, i would like to highlight some of these limitations and challenges that inflation targeting will have to tackle. the context let me start with some context. over the last 25 years or so, central banks have generally successfully anchored inflation to a low and stable regime. inflation targeting has played a key part in that success. in such a low inflation regime, two key features stand out : 1. when inflation is low, say 3 % and under on average, most of the variations in inflation will reflect changes in prices of goods or services in particular sectors. these sector - specific price changes tend to be uncorrelated with each other, reflecting sector - specific shocks. for example, high vegetable prices due to a drought or cheaper tvs from more efficient global production. as a result, movements in inflation tends to reflect relative price changes, rather than broadbased changes in the underlying price level. in other words, the various goods and services that make up the cpi basket

don't move together very much. this is in contrast to high inflation regimes where changes in prices are broad based. statistical measures show this, with a large decline in the contribution of the common component of sectoral price changes as economies move from high inflation regimes to a low one. for example, for the united states the contribution of the common component fell from around 60 % 1 / 4 bis - central bankers'speeches during the high - inflation years – up to the mid - 1990s – to around 25 % in the subsequent low - inflation period. other countries have had a similar experience. 2. inflation tends to be self - stabilizing. with inflation expectations well - anchored, there is limited pass - through of shocks across sectors so that price changes in one sector do not spillover to other sectors. importantly, wages and prices are only loosely linked with each other. as a result, the persistence of inflation is low as sectoral shocks do not propagate more broadly so that inflation quickly returns to previous levels after price shocks. for the same reasons, exchange rate effects on inflation also tend to be muted. in addition to these two structural features of low inflation regimes, an important development in the underlying economic context is the greater role of supply shocks. these have generated large and persistent relative price changes, which have become much more prominent in driving overall inflation. most recently, we have seen supply - side factors driving the post - pandemic inflation surge. large scale disruptions in global supply chains as well as shortages in key commodities, notably energy and food, have resulted in sharp global price spikes. the prominent role of supply - side developments for inflation dynamics not new. since the early 2000s, globalization – in particular, the integration of china into world trade and the opening up of emes – along with rapid technological developments led to a long secular decline in the price of tradeable goods relative to that of non - tradables, mainly services. these kept a lid on overall inflation, which on average hovered below central banks'objectives. we will continue to face persistent supply - side price pressures going forward. higher trade barriers, trade fragmentation, reconfigurations of global supply chains, demographic changes and the climate transition will drive large secular relative price changes. these forces may also increase inflation volatility to the extent that they make supply less elastic or less responsive so that demand shocks will translate into larger changes in prices. the challenge in this environment, inflation targeting faces three main challenges