Inflation is traveling in the wrong direction. Instead of going “north”, it is slipping “south”.

Today´s CPI was less than expected, with the core version print at 1.7% y-o-y, down from 1.8% in October.

Nevertheless, if Marvin Goodfriend´s nomination goes forward, the worry with nonexistent inflation will remain alive and well at the FOMC

From an interview in March 2013:

Tom Keene (at 10 min): Marvin, don´t you think we are going to see a dampening of GDP if we see a restricted Fed?

GOODFRIEND: There is no way that this recovery can proceed with any degree of confidence unless the Fed makes sure that inflation does not move up. So I think the risks are exactly reversed from the way the Fed chairman discusses this.

He has to make the public understand that any whiff of doubt about the Fed’s ability and willingness to stabilize inflation is going to put a crimp into the public’s willingness to take positions and commitments over the next two or three years that would produce genuine growth. And so I would just take it, and turn it on its head, and not put the question as you did to me, but reverse it.

The risks of allowing any latitude in inflation expectations to build dup, or any doubt about the Fed’s willingness to do what it takes to keep inflation down, is to me the most likely risk in preventing this recovery from getting any traction…

The charts show what had been going on at the time of the interview.

Inflation (PCE Core) was below target and coming down. Real growth was weak and weakening.

What transpired from that point on? Was Goodfriend´s inflation worry reasonable?

Not at all. Inflation remained “down & out” while real growth only experienced a temporary burst.

Until November 2015, the FF rate was stuck at “zero”. Since then it has been raised 5 times (including today). The “shape of things”, however, has more likely been determined by NGDP growth.

So Marvin, while NGDP growth remains low & stable, you can stop worrying about inflation and obsessing about interest rates. If you really want to “produce genuine growth”, just “crank-up” nominal spending growth.


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