Targeting Inflation

For indispensable reporting on the coronavirus crisis, the election, and more, subscribe to the Mother Jones Daily newsletter.

In general, which is a better inflation target: 2% or 4%? Matt Yglesias ponders the question here. I’ve long thought that the higher target is better for a variety of reasons (spurs consumption, allows wages to react to recessions faster, provides greater monetary flexibility, etc.), but my crude understanding of the situation is that even if this is all true, policymakers are afraid that once inflation targets get above 2% or so, you run the risk of a runaway spiral. Inflation of 4% is OK, but when that turns into 5% and then 7% and then 10%, you’ve got a big problem. And that’s what happens if you’re anything but maximally hawkish.

But what I don’t know is whether history really supports that view. Aside from episodes of hyperinflation, which aren’t really germane to our situation, do inflation targets higher than 2% often lead to an inflationary spiral? In America, the obvious historical episode is the high inflation of the 70s, but that had a variety of causes, and it’s not clear that inflation targeting (implicit in this case, since the U.S. Fed doesn’t have an explicit target) had anything to do with it.

Anyway, comments welcome. It’s obvious that a higher inflation target right now would probably be a pretty useful thing, but how about as a general policy? Would markets go crazy, convinced that the Fed would keep raising the target whenever the economy needed a bump? Or would they shrug after a while and just revert to all of their usual non-inflation-related pathologies? My guess is the latter, but what do I know?

Dear Reader,

This feels like the most important fundraising drive since I've been CEO of Mother Jones, with staggeringly high stakes and so much uncertainty. In "News Is Just Like Waste Management," I try to unpack the reality we all face and how we can rise to the challenge. If you're able to, this is a critical moment to support Mother Jones’ nonprofit journalism: We need to raise $400,000 to help cover the vital reporting projects we have planned, and right now is no time to pull back.

Monika Bauerlein, CEO, Mother Jones

Dear Reader,

This feels like the most important fundraising drive since I've been CEO of Mother Jones, with staggeringly high stakes and so much uncertainty. In "News Is Just Like Waste Management," I try to unpack the reality we all face and how we can rise to the challenge. If you're able to, this is a critical moment to support Mother Jones’ nonprofit journalism: We need to raise $400,000 to help cover the vital reporting projects we have planned, and right now is no time to pull back.

Monika Bauerlein, CEO, Mother Jones

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate