When central banks target inflation (say 2%) and the economy is growing around 2% (thus 2% deflation) they acctully produce 4% inflation in nominal terms. You'

When central banks target inflation (say 2%) and the economy is growing around 2% (thus 2% deflation) they acctully produce 4% inflation in nominal terms. You're mixing up two different notions of inflation here. There is the old-fashioned definition of inflation which calls any expansion of the "money supply" inflation. (With "money supply" in scare quotes because it's a pretty arbitrary concept, considering the multitude of very different definitions that exist.) Then there is the modern definition of inflation, which is simply a different word for aggregate changes in the price level. Those two notions of inflation are only superficially linked, and arguably, the modern definition makes more sense because it is what people are really interested in outside of economics. On the topic of NGDP targeting, the blog Unlearning Economics has two enlightening posts: http://unlearningeconomics.wordpress.com/2012/05/08/on-the-lousy-reasoning-behind-ngdp-targeting/ http://unlearningeconomics.wordpress.com/2012/05/08/on-the-l... http://unlearningeconomics.wordpress.com/2012/05/12/more-on-ngdp-targeting-and-bubbles/ http://unlearningeconomics.wordpress.com/2012/05/12/more-on-...