Higher Inflation Targets: All The Fed Has Left?

[BakshisMouse]

Hear me out: I think that higher inflation targets would be a good idea. Right now, sticky price cpi inflation is rather low, as seen by this data.

Why the sticky price cpi (which excludes food and fuel) is important:

 

And people who say things like “That’s a stupid concept — people have to spend money on food and gas, so they should be in your inflation measures” are missing the point. Core inflation isn’t supposed to measure the cost of living, it’s supposed to measure something else: inflation inertia.

Think about it this way. Some prices in the economy fluctuate all the time in the face of supply and demand; food and fuel are the obvious examples. Many prices, however, don’t fluctuate this way — they’re set by oligopolistic firms, or negotiated in long-term contracts, so they’re only revised at intervals ranging from months to years. Many wages are set the same way.

The key thing about these less flexible prices — the insight that got Ned Phelps his Nobel — is that because they aren’t revised very often, they’re set with future inflation in mind. Suppose that I’m setting my price for the next year, and that I expect the overall level of prices — including things like the average price of competing goods — to rise 10 percent over the course of the year. Then I’m probably going to set my price about 5 percent higher than I would if I were only taking current conditions into account.

And that’s not the whole story: because temporarily fixed prices are only revised at intervals, their resets often involve catchup. Again, suppose that I set my prices once a year, and there’s an overall inflation rate of 10 percent. Then at the time I reset my prices, they’ll probably be about 5 percent lower than they “should” be; add that effect to the anticipation of future inflation, and I’ll probably mark up my price by 10 percent — even if supply and demand are more or less balanced right now.

Source

Right now, the Fed's inflation target is about 2%. Why not increase that target to 4%? Such action would reduce real interest rates, spurring economic growth.

Greg Mankiw can explain this better than I can:

Greg Mankiw's Blog: Going Negative

Economic View - It May Be Time for the Fed to Go Negative - News Analysis - NYTimes.com

[moomin]

Probably because nobody thinks the price of money is the limiting factor in US investment.

[BakshisMouse]

Originally Posted by moomin

Probably because nobody thinks the price of money is the limiting factor in US investment.

As I see it, anticipated low