Kohn on inflation

Former Vice Chairman Kohn at a UofC monetary policy conference:

A global increase in commodity prices is “an adverse thing for the economy,” Kohn said. “It makes the monetary policy process more difficult.”However, “if those inflation expectations can remain anchored, it doesn’t really require the kind of response that some people are calling for.”

The issue is the link between inflation expectations and commodity prices. The Fed views food and energy as exogenous shocks or relative value shocks. Hence, policy should not be swayed by increases in food prices. In reality, higher food prices may cause general price expectations to increase. Similarly, a price increase in energy may cause a drag on the economy which may force the Fed to monetize to spur growth. Again, inflationary expectations may increase.

“Inflation will move up to the FOMC [policy-setting Federal Open Market Committee] target of 2% or a little lower, but it will probably take several years to get there,” This comment suggests that the Fed does not believe that any of the price shocks will translate to higher inflation. This may be a dangerous assumption.