"And let me stress this: given that we have downward-sticky nominal wages in the economy, requiring that the Federal Reserve hit its 2% inflation target year-by-year gravely damages the market economies ability to do its proper job in a time of substantial sectoral activity reallocation."
That's why the Fed in principle has a FLEXIBLE (forward looking) Average inflation target, my fear is they were too flexible in September 2021 and not flexible enough circa September 2023.
Having complained about newspaper pundits not explaining optimal inflation properly, I should say neither has the Fed. Bad Fed, bad!
And even if it is true that wages, a hugely heterogeneous group of prices (for which we have no proper price indexes; bad BLS, bad!) are the most important place for downward inflexibility, I think for expositional purposes it is less prone to misunderstanding if Fed and pundits stuck to talking about downwardly inflexible "prices" and not spotlight wages. It's likely to spook people like Arthur Burns.
At publication, by my reckoning was just about the time when the Fed should have been starting to pull back. 5- and 10-year TIPS expectations were just going over target
Admittedly the situation is not an easy thing to explain. The "public" still probable think that the optimal rate of inflation is always and everywhere zero and John Cochrane thinks that 2% is just pandering to frailty of central bankers who lack the intestinal fortitude to regard unemployment with a cold Olympian eye (and if it happens during the Administration of a Democrat, so much the better).
Your explanation does get to why why inflation is needed to allow relative prices to adjust to the large, discrete, shock of a change in sectoral demand. It would be better if people understood that this is just the discrete extraordinary version of why some inflation (why not 2%?) is needed to facilitate the gazillion micro shocks of ordinary economic events that require changes in relative prices.
Understanding this however does not mean that more than the minimum amount of inflation to allow relative prices to adjust in not bad. Inflation is bad because
a) There are also prices that are upwardly inflexible,
b) [I assert] trying to make forward-looking decisions which implies guessing future relative prices is more difficult and people are less will do less of it a with worse outcomes,
c) for political economy reasons -- when my wage or price of what I sell goes up I am responding to market demand as a good market participating citizen should; when the price of what I buy goes up it's somebody's fault, the Democrat in the White House or greedy capitalists (but never the Fed) -- and people just HATE it. and even the economists' old favorite,
d) behavior can change to make relative prices less flexible (entrenched expectations).
This means that there is a constantly shifting optimal (balancing costs and benefits) rate of inflation and it's the Fed's job to hit the nail on the head every time the the FOMC meets to set monetary policy instruments (not just ST interest rates) even though the effects of their actions are not immediate. It is an impossible job, but a man's reach should exceed his grasp lest what's there a Heaven for?
Ideally, the public, or at least newspaper pundits would understand what the Fed ought to be reaching for.
"And let me stress this: given that we have downward-sticky nominal wages in the economy, requiring that the Federal Reserve hit its 2% inflation target year-by-year gravely damages the market economies ability to do its proper job in a time of substantial sectoral activity reallocation."
That's why the Fed in principle has a FLEXIBLE (forward looking) Average inflation target, my fear is they were too flexible in September 2021 and not flexible enough circa September 2023.
Having complained about newspaper pundits not explaining optimal inflation properly, I should say neither has the Fed. Bad Fed, bad!
And even if it is true that wages, a hugely heterogeneous group of prices (for which we have no proper price indexes; bad BLS, bad!) are the most important place for downward inflexibility, I think for expositional purposes it is less prone to misunderstanding if Fed and pundits stuck to talking about downwardly inflexible "prices" and not spotlight wages. It's likely to spook people like Arthur Burns.
At publication, by my reckoning was just about the time when the Fed should have been starting to pull back. 5- and 10-year TIPS expectations were just going over target
Admittedly the situation is not an easy thing to explain. The "public" still probable think that the optimal rate of inflation is always and everywhere zero and John Cochrane thinks that 2% is just pandering to frailty of central bankers who lack the intestinal fortitude to regard unemployment with a cold Olympian eye (and if it happens during the Administration of a Democrat, so much the better).
Your explanation does get to why why inflation is needed to allow relative prices to adjust to the large, discrete, shock of a change in sectoral demand. It would be better if people understood that this is just the discrete extraordinary version of why some inflation (why not 2%?) is needed to facilitate the gazillion micro shocks of ordinary economic events that require changes in relative prices.
Understanding this however does not mean that more than the minimum amount of inflation to allow relative prices to adjust in not bad. Inflation is bad because
a) There are also prices that are upwardly inflexible,
b) [I assert] trying to make forward-looking decisions which implies guessing future relative prices is more difficult and people are less will do less of it a with worse outcomes,
c) for political economy reasons -- when my wage or price of what I sell goes up I am responding to market demand as a good market participating citizen should; when the price of what I buy goes up it's somebody's fault, the Democrat in the White House or greedy capitalists (but never the Fed) -- and people just HATE it. and even the economists' old favorite,
d) behavior can change to make relative prices less flexible (entrenched expectations).
This means that there is a constantly shifting optimal (balancing costs and benefits) rate of inflation and it's the Fed's job to hit the nail on the head every time the the FOMC meets to set monetary policy instruments (not just ST interest rates) even though the effects of their actions are not immediate. It is an impossible job, but a man's reach should exceed his grasp lest what's there a Heaven for?
Ideally, the public, or at least newspaper pundits would understand what the Fed ought to be reaching for.