Thursday, September 26, 2024

Whatever happened to the average inflation rate policy?



If you go back to August 2020, you may remember that the Fed announced a new policy of "average inflation targeting". If inflation was below the 2% target, the Fed would allow prices to move above the target, so that the average would 2%. 

It "seeks to achieve inflation that averages 2 percent over time ...following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time."

How did that workout? 

If we stay with higher inflation above 2%, that is there is an inflation floor of 2%, purchasing power will be lost forever. At best you might get wage increases to match inflation. Better wages will need to see higher productivity. 

Yes, to gain purchasing power you will need deflation and that is unlikely to happen. Inflation has been well above trend and no one especially the Fed has any plan or desire to change that situation.

The Fed will always push for higher inflation if inflation is below 2% and will always back-off the inflation target as it approaches 2% from above.

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