When did inflation start to matter?
Federal Reserve Update
Sign up for myFT Daily Digest and be the first to learn about the Fed news.
When it comes to inflation, we are beginning to think that 2% is the best point. But will this really affect the economic decisions of people and companies? Should price pressure continue to rise?
We don’t think that the 3% annual price increase will cause street riots. But in which aspect of price pressure, economic bureaucrats are playing with fire?
This is the most important macro issue at the moment. The inflation rate in the United States has reached a level not seen in decades. At the same time, Fed observers are struggling to deal with the new monetary framework, under which the central bank stated that they will allow inflation to exceed the 2% target for a period of time. Obviously, the Fed believes that the current inflation burst is temporary—and therefore tolerable. However, as far as we know, little is known about the speed at which the Fed is starting to worry about the inflation monster and how long it will tolerate price increases of more than 2%.
Last Friday, a living example of macro-investors and nominative determinism, Mark Dow, told us that in the 1990s, the accepted view was that inflation really started to become important—we mean to influence the investment decisions of companies and people’s Consumption pattern-is seen to be between 6% and 8%.
Like the 2% target adopted by most central banks, 6% to 8% has no reason to be an important milestone for inflation. Even so, people still suspect that it depends on your country. This makes it impossible to know whether the critical point this time will be the same as in the past.
After decades of consumer price inflation is still very low, are we more willing to tolerate higher inflation? The severity of the 1970s and 1980s has faded in most people’s minds? Or will it appear so out of sync with what we are used to, that even the slightest price pressure will trigger panic? In the United States, Google’s search for inflation rose rapidly in the second quarter, but has since declined.
Since 2008, how has the rapid rise in asset prices (especially housing prices) relative to consumer prices changed people’s perceptions of socially acceptable levels of inflation?
It’s not just that these questions lack answers, it’s that they are not being asked enough. This led to a binary debate about what could happen to inflation in the next few years. The hawks say that we will eventually return to the Volcker era. As monetary policymakers substantially raise interest rates to counter rising price increases, farmer tractors hover around the Federal Reserve. Doves pointed out that official forecasts show that as the economy reopens, price pressure peaked this year and then dropped to 2%.
We may eventually have a world in between. Global supply chains and technological changes may not have the effects of deflation since the 1970s. After the pandemic, the balance of power may have shifted slightly from capital to labor, thereby increasing the possibility of wage growth.Then there was such a phenomenon Green inflationIn such a world, it is feasible that the best inflation target is higher than it is now.