Inflation doesn’t need to get down to the Fed’s 2% price target, according to top economist Paul Krugman. That’s because the 2% inflation target was drawn from incorrect conclusions about interest rates. The Fed risks a recession if it raises rates to further lower inflation, experts have warned. Loading Something is loading.
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The Federal Reserve shouldn’t obsess over getting inflation back down to its target of 2%, and the national conversation around the issue has already died down as prices have continued to cool steadily throughout this year, according to economist Paul Krugman.
In an op-ed for the New York Times on Thursday, the Nobel economist pointed to elevated inflation over the past year, with prices falling from a 41-year-peak above 9% last summer to 4.9% in April’s Consumer Price Index report.
That’s still above the Fed’s long-run inflation target of 2% – but that target was arbitrary to begin with, Krugman said, and the number was largely drawn to give central bankers leeway to lower interest rates in the event of a recession. Inflation around 2% would prevent interest rates from hovering near the zero lower bound, according to a 2000 paper.
“But they were wrong. We have, in fact, spent a large fraction of the time since that paper was published at the zero lower bound, even though inflation has in fact averaged around two percent,” Krugman said.
Economists have also raised concern that the Fed risks losing credibility on inflation if it doesn’t get prices back down to the 2% target. But most people don’t even have a clear understanding of what the Fed even does, Krugman said, making the case that it was more important for the public to stop worrying about inflation.
And data shows that people may already be moving on from the topic: the 12-week moving average of Google searches for “inflation” has been on the decline since August of last year. That will dip even lower as grocery prices continue to fall, Krugman predicted.
Though Krugman said 4% inflation may be too high to assuage public concerns, prices hovering around 3% could be enough to smooth over worries about the US economy. The Fed also risks pushing the economy into recession if it continues to raise interest rates for the sake of pursuing its 2% inflation target, he previously warned.
“Should we be willing to pay a high price to get inflation down from 3 to 2?” Krugman said. “Will the Fed put the economy through the wringer to achieve an inflation target that we now know was based on old simulations that turned out to be wrong?”
Central bankers have raised rates aggressively to bring down inflation over the past year, which some commentators fear will drive the US into a recession as financial conditions tighten. The probability of a downturn coming in the next 12 months rose to 70% in May, per the New York Fed’s recession probability indicator.