In his Kentucky Day with the Commissioner (?) presentation today, James Bullard makes the case for targeting headline inflation. This is likely consistent with the recent hawkish turn he has taken, but is it correct? Is it true that we should expect core inflation to be a predictor of headline inflation, as he suggests?
First things first, though. Bullard proclaims victory for the quasi-monetarists:
This experience [rising asset prices in multiple markets, including stocks, bonds, commodities, as well as declining real interest rates and a depreciated dollar] shows that monetary policy can be eased aggressively even when the policy rate is near zero.
But then Bullard takes a turn toward hawkish land, with five points regarding core vs. headline inflation:
- Headline inflation refers to overall price indexes.
- Core inflation refers to the same indexes, but without the food and energy components.
- Core inflation is often smoother than headline inflation.
- Core eliminates 20% or so of the prices in the index.
- The “core” concept has little theoretical backing. It is very arbitrary.
Here is my problem: Our measures of inflation are both dubious at best, and a lagging indicator. The focus on headline inflation in the run-up to the crash of 2008 is the reason why monetary policy failed. Nowhere in the talk did Bullard mention unemployment, which I view as a good thing. However, he could have mentioned that a wage-price spiral requires that wages spiral, as well. That doesn’t seem to be happening:
I didn’t hear the lecture, but from reading the notes, I’m quite confused. Does Bullard believe that the current spike in headline inflation is a trend, and why? Furthermore, should the Fed be targeting where inflation has been, or the forecast of future inflation, which is within a reasonable range as of right now.
It all seems to me to strengthen the case for NGDP level targeting. Then we wouldn’t be having these silly debates. All you have to ask is: “Is NGDP growing on target?”
Not quite yet. And furthermore, I would argue that we need a period of above-trend growth in NGDP in order to get capacity utilization level to their previous trend as quickly as possible. There may be merit to shifting to a lower trend rate of NGDP growth, but not at a moment when capacity utilization is low, and unemployment is high. In short, I see no threat of the current headline inflation pressures translating into accelerating inflation. The Fed should continue to be accommodative until at least the point that we reach the previous trend level of NGDP.
P.S. Sorry for the incredibly bad charts. For some reason, Excel is force closing on my computer now, and I had to switch to using Openoffice.org. I am less than impressed, to say the least.