Courtesy of Mish.
Yet another economic writer has caved into to illusion that central banks need to raise the inflation target to four percent.
In 2010, Olivier Blanchard, the former chief economist at the International Monetary Fund, offered reasons for a higher inflation target.
Wall Street Journal’s chief economics commentator Greg Ip was against the idea them, but suddenly had a change of tune. “Events have weakened the rationale against the current two percent target”, says Greg Ip.
Please consider The Case for Raising the Fed’s Inflation Target by Greg Ip.
Six years ago, Olivier Blanchard, then chief economist at the International Monetary Fund, floated the idea that central banks should target 4% inflation instead of 2%. I remember giving a colleague countless reasons why he was wrong.
It was I who was wrong. Events since 2010 have led me to conclude those objections no longer apply. The Federal Reserve should give serious consideration to raising its inflation target. Here are my original objections and how they have changed.
Wrong Then, Even Wronger Now
1. Ip Then: Central banks have invested their credibility in a 2% target. If they raise it, the public will assume they’ll raise it again, and expectations will rapidly become unanchored.
1. Ip Now: The fact that inflation has actually drifted lower despite repeated doses of unconventional monetary stimulus shows that inflation is quite inertial and not easily dislodged by questions of credibility. If anything, central banks are too credible: Investors seem to believe 2% is a ceiling, not a midpoint.
1. Mish: Inflation expectations were a joke then. They remain a joke now. Pray tell what consumers give a damn about expectations? Is the average Joe on the street concerned about “expectations” or “reality”. What’s become “unanchored” is Greg Ip’s thought process.
2. Ip Then. As inflation rises, individual prices become more volatile, which makes the economy less efficient and more prone to booms and busts.
