16 Mar 2012

Market Monetarism Bask

Economics, Federal Reserve, Inflation 18 Comments

Somebody help me out here: Scott Sumner is acting like Ben Bernanke is contradicting himself with current Fed policy, and yet the latest BLS report shows that over the last 12 months, the “core” price inflation rate was 2.2%. (The headline CPI rate year/year was 2.9%, while on the PPI we see that finished goods are up 3.3%, intermediate are up 3.3%, and crude goods are up 0.7% [sic].)

So why couldn’t Bernanke say to Scott Sumner:

What’s your deal? Our target for core CPI is between 1% and 2%. We’ve been saying for a long time now that although unemployment is obviously higher than we’d like, at the same time we are concerned about fueling price inflation. And even though we’ve been scandalously tight in your book, over the last year we’re already above our target for price inflation. Therefore we’re already in stagflation, and you’re just telling us to move to a different point in the ugly tradeoff. OK fine, that’s your opinion, but stop acting like we’re below the efficient frontier or something. Yeah, it’s possible that the market forecasts (or even our official Fed forecasts) a year ago predicted less than 2.2% price inflation, but they were obviously wrong. In practice, we produced more price inflation than we wanted, and so our conservatism panned out.

18 Responses to “Market Monetarism Bask”

  1. Desolation Jones says:

    But the Fed targets core PCE, not CPI. The last report showed 1.9% and they’ve been way under 2% for the past 3 years.

    • Dan says:

      How does that really change anything? Does the Fed have some mandate to run 4% or so now to get the 3 year average up to 2%?

    • Major_Freedom says:

      In other words, the Fed has been reaching its target of 1-2% core PCE.

      • Desolation Jones says:

        No, the fed has always had an implicit 2-3% target, not a random target between sub 1% and 2% and most recently it adopted an explicit 2% target. Its also isn’t a firm 2% target. It’s a long term goal.

        • Major_Freedom says:

          If the core PCE is at 1.9%, then they are succeeding at reaching their target of 1-2% core PCE.

          • Desolation Jones says:

            No because between 1% and 2% is NOT their target. The trend inflation rate in rate of the great moderation has been between 2% and 3%, which has also been their implicit target. And they have a dual employment and inflation mandate where both are suppose to be given equal weight, but inflation is way down and the unemployment rate is way up compared to full the full employment level.

            Also, currently unemployment is trending down so Murphy can’t be claiming there’s stagflation or that Bernanke thinks there’s stagflation.

            • Major_Freedom says:

              No, because 1-2% core inflation IS the Fed’s target.

              http://www.federalreserve.gov/faqs/money_12848.htm

              “The FOMC noted in its statement that the Committee judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s statutory mandate.”

              Inflation is NOT “way down.” Inflation is UP.

              Regarding employment, yes it’s been trending up, thanks to Ben CRTL-P Bernanke, but it’s still a ways to go to get to pre-crisis levels.

              • Bob Murphy says:

                MF not sure if you know this, but your quote there is consistent with Desolation Jones’ statement. DJ is saying (correctly, I think) that the Fed targets core PCE, as opposed to core CPI. My guess is that once core PCE is running at 3%, the Fed will start targeting “the amount of money unemployed people spend on baseball cards.”

              • Major_Freedom says:

                DJ is saying (correctly, I think) that the Fed targets core PCE, as opposed to core CPI.

                That’s what I have been saying too…I think.

                I say the Fed is reaching its target with a 1.9%, DJ seems to think that it’s not, not sure why. He’s saying inflation is “way down.”

                My guess is that once core PCE is running at 3%, the Fed will start targeting “the amount of money unemployed people spend on baseball cards.”

                Ain’t that the truth.

            • Desolation Jones says:

              You’re trying to prove that the fed is targeting between 1-2% inflation, but you quote me something that says they’re targeting 2% I’m not sure how this proves your point. Anything below 2% is supposed to be bad an and anything above 2% is supposed to be bad.

              This is the graph the fed looks at.

              http://research.stlouisfed.org/fredgraph.png?g=5M9

              Look at the years before the recession and look at the years after the recession. For the vast majority of the time after the 2008 crash, core PCE has been way under 2%

              • Major_Freedom says:

                You’re trying to prove that the fed is targeting between 1-2% inflation, but you quote me something that says they’re targeting 2% I’m not sure how this proves your point. Anything below 2% is supposed to be bad an and anything above 2% is supposed to be bad.

                Oh come on. It’s rare to be exactly at 2% all the time. Since they’re at 1.9%, that’s effectively 2% and good enough to say they’ve reached their target.

              • Robert Fellner says:

                Am I missing something? The Fed says that targeting inflation always refers to headline PCE. Why is everyone referring to their target as being based on core PCE?

    • Robert Fellner says:

      My understanding is that their new target is for headline PCE, not core PCE. See:

      At the January meeting, the Federal Open Market Committee (FOMC) took an important step forward by naming an explicit, numerical inflation target for the U.S. of 2 percent, as measured by the personal consumption expenditures (PCE) price index.
      In a targeting context, inflation means headline inflation.. By the headline PCE measure, U.S. inflation is running somewhat above target right now, at 2.4 percent measured from one year ago. This rate has been moderating in recent reports. Inflation is up sharply when compared with the autumn of 2010, when PCE inflation measured from one year earlier hit a low of about 1.2 percent. We are double that rate right now.

      http://research.stlouisfed.org/econ/bullard/pdf/Bullard_Inflation_Targeting_in_the_USA_06Feb2012_final.pdf

  2. Major_Freedom says:

    Sumner has recently been promoting the following story:

    “Bernanke is a closet market monetarist who let it slip 10 years ago that he really believes NGDP is the best statistic to target, not price inflation or interest rates, and yet by his actions, he is way under a 5% NGDP target, and so he is contradicting himself.”

    • UnlearningEcon says:

      I don’t understand this reasoning:

      a) Bernanke agrees with my theoretical views

      b) He has failed in practice

      My views are right!

  3. Greg Ransom says:

    Scott doesn’t believe in the existence of inflation …

    There is not such thing.

  4. Blackadder says:

    Since when has the Fed target for core inflation been “between 1% and 2%”?

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