Wednesday, February 10, 2016

Central Banks: Show Me the Inflation!

     The Fed rightly sets its goal for inflation at 2%.  Positive inflation has a number of benefits.  Most importantly, it allows for more flexible monetary policy by opening the door to negative real rates to stimulate the economy.  Furthermore, price increases can have a positive impact on sentiment.  For years, the Fed and other central banks have espoused this target but where is the inflation?  In the U.S. the CPI rose less than 1% last year.  In Japan, prices actually fell.  In the countries of Northern Europe there is fear of deflation.  So if the central banks maintain these targets, I say, "show me the inflation."

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