I share Sabrin’s skepticism about the 2% inflation target, but his arguments against it are rather weak and don’t refute the conventional wisdom, which is as follows. A little inflation is considered desirable in a world of low interest rates where “real” interest rates on risk free assets occasionally need to be negative during the course of a normal economic cycle (regardless of Fed policy). Secular inflation tends to raise nominal interest rates, thereby making it possible for real rates to be negative while nominal rates are still positive. Inflation also facilitates any needed downward adjustment of some real prices in the economy (while others are increasing) , particularly real wages and salaries, whose nominal values tend to be “sticky downward”. It is also believed that conventional measures of inflation like the CPI overstate true inflation, though l personally am skeptical that there is such a thing as the “true” rate of inflation. Of course, the 2% target is still an arbitrary number.
I would like to see someone debunk the conventional wisdom, which the Fed apparently believes in, that’s laid out here.
I share Sabrin’s skepticism about the 2% inflation target, but his arguments against it are rather weak and don’t refute the conventional wisdom, which is as follows. A little inflation is considered desirable in a world of low interest rates where “real” interest rates on risk free assets occasionally need to be negative during the course of a normal economic cycle (regardless of Fed policy). Secular inflation tends to raise nominal interest rates, thereby making it possible for real rates to be negative while nominal rates are still positive. Inflation also facilitates any needed downward adjustment of some real prices in the economy (while others are increasing) , particularly real wages and salaries, whose nominal values tend to be “sticky downward”. It is also believed that conventional measures of inflation like the CPI overstate true inflation, though l personally am skeptical that there is such a thing as the “true” rate of inflation. Of course, the 2% target is still an arbitrary number.
I would like to see someone debunk the conventional wisdom, which the Fed apparently believes in, that’s laid out here.