@pat
You are giving miners a huge amount of power in your system. Do they have good incentives to make prudent decisions?
Miners can be made wealthier in two ways:
Increasing the total social surplus created by bitcoin = the good way
Increasing the share of this surplus distributed as mining rewards = the bad way
If miners were representative of all potential beneficiaries from bitcoin it might not be an issue. I don't think they are. There is a significant danger that the system of one mined block one vote will lead to miners assigning themselves excessively large rewards.
Perhaps there are different ways of registering these votes? The reason why I thought miners might do the trick is that the barrier to entry to mine is not too high, so anyone who wants to register their opinion about inflation rates can start mining and join a mining pool. Right now, deepbit (the dominant mining pool) accounts for ~50% of new blocks. I should also add that one might also implement speed limits on the rate at which the target inflation rate can be changed, in the same way that difficulty now can't be increased or decreased by a factor of more than 4 every two weeks.
Originally, I had liked Suggester's old suggestion of tying mining rewards to hash rates, so that the money supply would at least roughly track the number of active users weighted by their investment in the system. But that doesn't really allow for monetary deflation when it's necessary, and it also ties up huge resources in mining, neither of which seems like a good idea.
I'd be happy to hear of other ways in which the target inflation rate might be determined. Personally, I would favor something democratic and dynamic over an algorithmic solution, as a way to acknowledge that we're all fallible and can't perfectly predict the future, so we need a mechanism for allowing consensus decisions to be changed.