Why getting inflation down to 3 percent is probably enough
In the not-too-distant future we’ll probably see inflation fall enough that we’ll have to make some hard decisions about when to declare victory.
I have increasingly been turning to wages as a measure of underlying inflation. That’s not because I think greedy workers are driving inflation — they clearly aren’t. But wage growth is probably a pretty good indicator of how hot or cold the overall economy is running (and you can’t have a wage-price spiral without spiraling wages).
Underlying inflation will probably come down reasonably soon, although it will be above the Fed’s target of 2 percent inflation. But is that the right target? How much pain should we be willing to suffer to squeeze inflation down to that point?
As it happens, a number of economists, myself included, have long argued that the 2 percent target is too low. This isn’t a radical position; many of the advocates of a 3 or even 4 percent target are as mainstream as they get. Recently, Olivier Blanchard, the former chief economist of the International Monetary Fund, made the case for 3 in The Financial Times.
Situations in which even a zero interest rate isn’t enough to generate full employment, which were supposed to be very rare with 2 percent inflation, have turned out to be all too common: The financial crisis would have been easier to deal with if we’d come into it with 4 percent inflation, the rate during Ronald Reagan’s second term.
In the months ahead we may well face a choice between imposing a recession to get inflation back down to a largely arbitrary target, which we wouldn’t have chosen 20 years ago if we’d known then what we know now, and declaring victory with inflation fairly low but not quite that low.
Paul Krugman New York Times newsletter 2 December 2022
https://www.nytimes.com/2022/12/02/opinion/inflation-percent-jobs-report.html
Must Inflation Be Brought Down All the Way to 2%?
The latest data suggest inflation isn’t spiraling uncontrollably, even if it remains high. Central bankers don’t ultimately care if inflation stops rising: They want it to go down, back to the 2% number they are mandated to hit.
“Why must inflation be around 2%?” is a question that obsessed central bankers back when inflation was stubbornly below their favorite target. It makes more sense to ask it now.
Inflation in many rich countries has been decelerating since July, yet economists don’t expect it to return to 2% until a distant 2025
But what if inflation stabilizes at a higher rate—say between 4% and 6%?
In this plausible case, central banks may be compelled to start needlessly raising rates again, catching investors off guard. It would make a lot more sense to raise the inflation target instead, or define it as a wider range.
The Reserve Bank of New Zealand, which pioneered inflation targeting in 1989, arbitrarily chose a 0%-to-2% range simply because then-Minister of Finance Roger Douglas thought it sounded low.
WSJ 4 December 2022
https://www.wsj.com/articles/must-inflation-be-brought-down-all-the-way-to-2-11670162817
Riktiga karlar är inte rädda för lite inflation
Rolf Englund 19 februari 2010
https://englundmacro.blogspot.com/2010/02/riktiga-karlar-ar-inte-radda-for-lite.html
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