That’s Heritage Foundation economist EJ Antoni yesterday. Dr. Antoni continues:
Increasingly, people are realizing that the 2% target is long gone. We’re looking at 3% basically as the implicit target. Now we’re in for a lot of pain. So the question is just, is this going to be 1920 or is it going to be 1929
I wondered what the basis for this assertion was. As usual with Dr. Antoni, it’s hard for me to determine. Take a look at 3 year median expected CPI inflation of consumers.
Figure 1: 3 year median expected CPI inflation deviation from 2.45% target (blue). NBER defined peak-to-trough recession dates shaded gray. Source: NY Fed, NBER, and author’s calculations.
Seems to me that the Fed’s coming close to re-establishing credibility, insofar as households are concerned.
One can measure Fed credibility with respect to its inflation target in a variety of ways. I use plot three measures.
Figure 2: Bordo-Siklos (2015) credibility measure using 2.45% target (blue), squared deviation of expectation from 2.45% target (green), 75th percentile deviation from 2.45% target (red). NBER defined peak-to-trough recession dates shaded gray. Source: NY Fed, NBER, and author’s calculations.
It’s true the folks at the 75th percentile remain skeptical — but no more so than at the end of the Trump 1.0 administration. The Bordo-Siklos measure seems almost dead on.
Heritage boy is playing fast and loose beyond his claims about credibility:
“Now we’re in for a lot of pain. So the question is just, is this going to be 1920 or is it going to be 1929”
We’re in for a lot of pain because of a 3% implicit inflation target (sic)? Based on what evidence, exactly? Inflation in 1920 was 15.6% and had been above 15% in the 3 prior years. In 1929, the inflation rate was zero, had been negative in the prior two years and conti ued negative in the 4 subsequent years:
https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1800-
Inflation is now very close to target, far below the rate in 1920 and well above the deflation associated with the Great Depression. Heritage boy is either ignorant of the facts, or is relying on the ignorance of his readers. So which is Heritage boy warning us about, inflation, or deflation?
Oh, and I’m pretty sure there is nothing in the literature to demonstrate that a 2% inflation target is better in any way than a 3% target.