According to Neil Irwin, Paul Volcker (Fed chairman from 1979 to 1987) liked the idea of zero inflation:
One view was that zero inflation should be the goal — that a dollar today should have the same buying power as a dollar in a decade, or two or three. That was the view embraced by, among others, Paul A. Volcker, the former Fed chairman.
Irwin says New Zealand in 1989 was "the first country to set a formal target for how much prices should rise each year — zero to 2 percent in its initial action." By the end of that paragraph, though, Irwin drops the zero:
A 2 percent inflation target is now the norm across much of the world, having become virtually an economic religion.
Then, after noting more recent events, Irwin writes:
All of this has quite a few smart economists wondering whether the central bankers got the target number wrong. If they had set it a bit higher, perhaps at 3 or 4 percent, they might have been better able to combat the Great Recession...
So zero, and then zero-to-2%, and then 2%, and now 3-to-4%.
3 comments:
And, when 3-to-4% doesn't solve the problem, what?
Art
It is an interesting body of work.
We create a two synthetic macro price levels which are interchanged often to mean the same thing depending on what story needs to be told.
The GDP Deflator includes only domestic goods and not anything that is imported while the CPI includes anything bought by consumers including foreign goods; also, the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers, except for things that require a Hedonic Quality Adjustment.
I see three basic flaws
1. It is impossible to pick a representative basket of goods, services and assets.
2. Even if one could by pure luck manage to do so, measuring that basket is in and of itself impossible.
3. Even if a magic fairy told the Fed what the basket was and how to measure it, it is virtually impossible for the Fed to tweak interest rates and money supply to hit that target.
On top of that 33% weight of the CPI is allocated to OER, homeowners are considered to rent to themselves, which means by the standard conventions of the national accounts, anyone who owns their own home is renting that home to themselves.
The BEA imputes the value of that rent as both income and spending for the household sector, even though no money changes hands. These owners’ equivalent rents account for a bit over 10 percent of official household consumption, representing housing services provided by owner-occupied homes.
This is a graph on how OER tracks to case Shiller composite home price index. OER is 31 percent of the core CPI index. IMO CPI is currently under stated if you correctly factor in housing prices.
https://fred.stlouisfed.org/graph/?graph_id=388449
Reminds me of when I was sighting one of my long guns in and I by mistake was using my two-hundred-yard scope marker and shooting at 100 yard targets. Missed what I was shooting at every time
Good analogy, gun scope.
I remember you telling me about "owners equivalent rents" before. I didn't know.
For a long time I wondered about CPI versus the GDP Deflator. Then one day it just made sense: the deflator is for GDP-related numbers, and the CPI is for consumer & household related numbers. That's how I use them now.
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