Inflation constitutes one of the foremost economic problems in 3emerging market economies. This has required monetary authorities to use tools and policies to put a stop to high prolonged and volatile inflation. The negative consequences of inflation to the economy are well known. Inflation can result in a decrease in the purchasing power of the national currency leading to the aggravation of social conditions and living standards. High prices can also lead to uncertainty that makes domestic and foreign investors reluctant to invest in the economy thus affecting investment, growth and poverty thereof. Moreover, inflated prices worsen the country’s terms of trade by making domestic goods expensive on regional and world markets. In Tanzania, inflation is one of the major macroeconomic problems that dominated the country especially during 1970’s to 1990’s. Inflation reached the highest level of 44.6 percent ever experienced in the economy in April 1985. From 1985 inflation continued to be high in double digits level before declining to single digit level of 9.1 percent in January 1999. Huge budget deficits, external shocks, especially during the first and second oil price shocks of 1973-74 and 1979, Kagera war of 1979, excessive government borrowing and structural rigidities are some of the reasons that caused and sustained high rates of inflation since the late 1970’s. Inflation rose from 3 Emerging markets are countries that are restructuring their economies along market-oriented lines and offer a wealth of opportunities in trade, technology transfers, and foreign direct investment 2 30.2 percent in January 1980 to 36.4 percent in January 1981.With tight fiscal and monetary policy framework inflation continued to decline from 9.1 percent to a lowest level of 3.4 percent in June 2004. However, since June 2004, inflation started to gain momentum and increased from 3.4 percent to 12.2 percent in December 2009. From January 1980 to December 2009 inflation in Tanzania averaged to 20.2 percent.