August 22, 2016
That seems to be the story according to MarketWatch. It quotes Stanley Fischer the vice-chair of the Federal Reserve Board as saying, “We are close to our targets” for inflation and unemployment. Fischer adds, that the current 1.6 percent inflation rate shown by the core personal consumption expenditure (PCE) deflator is “is within hailing distance” of the Fed’s 2.0 percent target.
Actually, this is not true. The 2.0 percent target was always identified as an average, not a ceiling. This means that periods of below 2.0 percent inflation should be averaged out with periods of above 2.0 percent inflation to reach the 2.0 percent target. If the Fed were sticking to prior policy, it should be looking to have an inflation rate somewhat above 2.0 percent for a number of years to offset the long period of below 2.0 percent inflation by this measure.
The figure below shows the year over year measure of the core inflation rate since the beginning of 2011. Not only has it been below 2.0 percent for the last four years, it shows no tendency to increase. Stanley Fischer is of course free to deviate from the Fed’s official target in his thinking, but it would have been appropriate to point that fact out. This makes it a much more newsworthy story. Of course, if the Fed does start raising rates the point is to slow the economy and limit the number of people who have jobs. That’s a big deal.
Source: Bureau of Economic Analysis.
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