The PCE inflation rate since 1990 averaged 2.09% per annum.
What’s interesting about this diagram is that even though the Fed does not officially target the PCE price level, the data above suggests that the Fed is behaving as if it does.
As a price-level (PL) target is equivalent to a nominal GDP (NGDP) target in a wide class of macroeconomic models (especially under the assumption of constant productivity growth), then what more does the NGDP crowd expect from an official NGDP target? Seems to me that they are just asking for more price inflation and wishfully hoping that some of the subsequent rise in NGDP will take the form of real income.
Tell me I’m wrong (and why).
Pointer from Mark Thoma.
1. I made a similar point when I wrote,
From April of 2003 through April of 2008, the rate of growth of the CPI averaged 3.2 percent. From April of 2008 through April of 2013, it averaged 1.6 percent. If in 2007 you had asked macroeconomists to predict the consequences of a decline in the inflation rate of that magnitude, how many would have told you to expect unemployment to rise above 7 percent? None of them would have foreseen it. My guess is that many of the macroeconomists would have regarded a drop in inflation of 1.6 percentage points as close to a non-event for unemployment.
2. I downloaded the quarterly PCE data from 1990 Q1 through 2013 Q3. The average inflation rate (simple average, not compounded) was 2.16 percent for the whole period. For the sub-period prior to 2008 Q3 it was 2.34 percent. For the sub-period since it has been 1.43 percent. So, suppose the Fed’s inflation target was actually 2.34 percent. In that case, it recently undershot its target by 0.91 percentage points. As I pointed out above, that hardly seems like enough to cause Armageddon.
In fact, it was not even the worst miss. From 1997 Q3 through 1999 Q3, the PCE inflation rate averaged 1.10 percent, which would be a miss of 1.20 percentage points. If 0.91 caused the Great Recession, why was 1.20 consistent with strong growth?
3. One of Scott Sumner’s arguments against targeting prices is that prices are mis-measured. I think if you go with the mis-measurement argument, you have to explain away the 1997-1999 anomaly by saying that there was more inflation and less real growth than what the statisticians reported; turning to 2008-Q3 to present, you explain the anomaly by saying that there was less inflation and more real growth than what the statisticians reported. I think those are pretty difficult cases to make. The sorry-looking employment figures for the last five years are consistent with weak real growth. (NOTE: I wrote this before Scott Sumner replied, but I think I anticipated most of Scott’s points. These days, I almost never publish a post immediately. Scheduling them in advance instead makes me more careful.)
4. I hope that Andolfatto sees that there is a larger point to be made here than to pick on Scott Sumner. If a “wide class” of models suggests that you would not see a Great Recession arising from a small miss to an inflation or price-level target, then I think it is time to open one’s mind to other ideas.
(The term “wide class” sticks in my craw. In my table of contents, you may recall that I said “the macroeconomics profession became narrow, inbred, and retarded.” The book is progressing well, but I have left that phrase out for now.)
Scott does not claim the drop in inflation caused the recession. He claims the Feds reaction to the oil supply shock caused the recession. Sorry but sharply tightening money as the economy teeters toward recession does make depression
Tried to post this earlier, but it apparently didn’t take.
I think Scott would say never reason from a price change. For instance, during the two big “misses” you identified, 3Q97-3Q99 vs 3Q08-2Q13, NGDP and RGDP were doing radically different things. 5.9% vs 2.4% growth (simple averaged) for NGDP and 4.5% vs 1.0% growth for RGDP.
Clearly, these two price changes were caused by different things. In one case, Scott would say the Fed should have been tightening some; in the other, he would say the Fed should have been easing a lot.
So don’t the periods you identify actually support Scott’s point that price level targeting is not the same as NGDP targeting? Or have I missed something?
I suggest you replace “retarded” with something less pejorative but still to the point like “limited by an overly narrow pattern of working”
[By the way, none of the mentally limited people I’ve ever met deserved any of the pejorative implications of the word retarded – which is why the term keeps getting replaced I suppose….]
Doesn’t housing alone account for much of the mismeasurement? Housing, as rental cost or owners’ equivalent rent, is about 30% of CPI and 40% of core CPI. During the crisis, the Case-Shiller index fell by 40%, while the housing component of CPI actually increased by 10%. In effect, CPI did not notice that there was a housing crisis. So I don’t find it unreasonable to think that inflation has been overestimated during the past 5 years (and perhaps underestimated by CPI before the crisis).
Arnold,
I just came across this post of yours.
“I hope that Andolfatto sees that there is a larger point to be made here than to pick on Scott Sumner. If a “wide class” of models suggests that you would not see a Great Recession arising from a small miss to an inflation or price-level target, then I think it is time to open one’s mind to other ideas.”
Do you have a model where a small miss in a price-level target generates a Great Recession? Rather that disparaging the profession, why don’t you share it with us? And please explain why all those misses in the data did not generate Great Recessions.
(The term “wide class” sticks in my craw. In my table of contents, you may recall that I said “the macroeconomics profession became narrow, inbred, and retarded.” The book is progressing well, but I have left that phrase out for now.)
I recommend that you leave that phrase in, Arnold. It’s so conducive to starting a respectful discussion.