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Inflation and complacency – Marginal REVOLUTION

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While I agree with those who predict a higher rate of price inflation from the current stimulus plan, it just doesn’t upset me so much (I am much more worried about the poor way we are spending much of the money, and the political precedents being set for vote-buying).  It has long struck me as the utmost in complacency that the rate of price inflation has to be 1.8% every year.  Even if that is “the best inflation rate” (under what ceteris paribus conditions?), how important a regularity is that?  How well does a totally predictable rate of price inflation predict prosperity?  I would suggest we simply do not know, but it is far from obvious that the predictive power here is strong, if it is present at all.  The empirical case here is quite weak, especially if you adjust for the quality of the government in question.

I am thus happy with average inflation targeting over the previous operating regime of the Fed.

When someone says “The rate of price inflation has to be 1.8%,” what I really hear is “we cannot impose very large pay cuts on what are effectively tenured bureaucrats.”

That all said, I really do not regard higher rates of price inflation as any kind of tonic for an ailing labor market, and I see that many respondents are not able to outline what a mechanism might be connecting inflation and higher employment, rather they simply restate that one will lead to the other without telling us how.  The important thing is to prevent deflationary pressures in the first place.