Jens Weidmann, the president of Bundesbank said, faster technological advancement will help to cut inflation only temporarily. With much of the industrialized world struggling with anemic inflation levels, some economists argue that rapid technological development keeps a lid on prices, forcing central banks to exhaust their firepower fighting an economic paradigm shift, and leaving them with few tools for the next downturn.
A problem with low inflation is that it reduces what is considered a natural interest rate, so a central bank would have reduced room to cut borrowing costs in a downturn. Some have argued for a higher inflation target as a way to raise price expectations, which would then naturally increase inflation and thus interest rates.
But Weidmann flatly rejected this suggestion.
“I am convinced that we should continue to aim for an inflation rate below, but close to, 2 percent over the medium term and should not raise doubts about the credibility of our monetary policy.”