But don't they realize that then this gets baked-in in people's expectations. I.e. when they say 5% people know to adjust accordingly and think, oh 10%, and so on.
Short term this might work, but long-term (year or more) it becomes useless.
Short term this might work, but long-term (year or more) it becomes useless.
http://en.wikipedia.org/wiki/Rational_expectations
So, one way to diminish the crippling effects of inflation is to lie and say there is none. Of course, as you say, in the long run you'll get hammered, as people's expectations fly out of whack and they are required to guestimate future rates of inflation.