June 26, 2017


Ending the Fed's Permanent Inflation Policy (JAMES R. ROGERS, 6/26/17, Law & Liberty)

The Federal Reserve Board seeks to maintain an inflation rate around two percent per year. While this rate might sound low for older types who remember double-digit inflation rates in the late 70s and early 80s, and a rate of 5.4 percent as recently as 1990, why tolerate, let alone seek to sustain, any inflation at all? Why not seek to establish zero inflation and stable prices? After all, even an inflation rate of only two percent a year means nominal prices still double every 36 years. And while people can and do broadly adjust their behavior in the face of anticipated inflation, it's not a seamless process. Inflation distorts people's economic decisions, whether as producers or consumers, labor or capital, and so imposes costs on us all.

The Fed aims to maintain a two-percent inflation rate because it fears a lower inflation rate would deprive it of the monetary policy tools it needs in case of recession. As Ben Bernanke explained at a 2013 press conference: "If you have zero inflation, you're very close to the deflation zone and nominal interest rates will be so low that it would be very difficult to respond fully to recessions. And so historical experiences suggested that 2 percent is an appropriate balance." Basically, the Fed intentionally seeks to create and sustain a positive inflation rate in order, in turn, to sustain nominal interest rates higher than would exist with zero inflation.

The decoupling of demand and prices allows for permanent good deflation.

Posted by at June 26, 2017 9:09 AM