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."