The Fed and Inflation

There was a Letter to the Editor in a recent Wall Street Journal that talked about a “half-truth” that inflation is “always” a result of rapid economic growth and low unemployment.

The Fed’s obsession with its arbitrary 2% inflation target compels them to argue that higher inflation is desirable because it is always linked to stronger economic growth. The governors simply ignore evidence to the contrary, such as in 2017 when, after the first quarter, growth accelerated and unemployment fell, yet inflation rates declined.

Couple things about this claim. One is that that isn’t the only argument the Fed makes on the matter or on the Fed’s role. The Fed’s role is to maintain price stability (and low unemployment, but price stability facilitates that), and any target rate of inflation, within a broad range, does that.  The Fed targets 2% in order to have…engineering slop…as a cushion against the natural fluctuations of inflation taking the economy into a deflationary period, which if sustained can have more deleterious effects than high inflation.  Much higher target rates make maintaining stability more difficult.  Two per cent is a suitable middle ground target.

The other thing relates to those natural fluctuations in inflation rates, and their inputs. Stauffer is assuming, falsely, that a single occurrence, a single quarter’s behavior—an anecdote—is the trend.  Not at all.  It’s just noise.

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