The reality of “low inflation” which the Fed cannot grasp

Over the past 10 years, core PCE inflation has averaged 1.5%. The latest print is exactly there. For the previous 14 years, core PCE inflation averaged 1.85%. No one complained, in part because there was no magic 2% target. Inflation only had to be “low & stable”.

The charts help explain. With stable nominal spending (NGDP) growth, you get stable inflation. With lower and stable NGDP growth, you get lower, but still stable inflation.

So there´s no mystery. If the Fed wants inflation closer to the 2% target, it has to increase the growth rate of nominal spending.

There is, however, also a “levels” aspect. The charts show that the level of NGDP fell drastically after mid-2008, never “recovering”, just “expanding”.

Some recovery, even if to a level below the previous one, is certainly possible. If the Fed tried, it would do wonders for the economy, with real growth going up and inflation converging to target.

However, the Fed has decided that to “drive slowly is to grow longer”!


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