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The 2% Inflation Target is Arbitrary



New York City, Updated June 26, 2023 ~ We believe the 2% inflation target may have undesirable effects on nations as a whole and on certain demographics within (i.e., middle class of advanced economies). The 2% inflation target adopted almost 20 years ago has negatively impacted the middle class in the United States as nominal wage growth has plummeted with average annual nominal wage growth declining from over 7% from 1980-2009 to under 3% from 2010-2022. The Fed’s adoption of the 2% target led to 17 rate increases in a row prior to the Global Financial Crisis, arguably causing, or at least exacerbating, the great recession.


Under the current market environment, we believe that the 2% rate should be the floor for inflation, not the ceiling, and the Fed should adopt a more flexible 2-4% range for inflation. This would optimize economic growth and nominal wage growth.


The team at Infrastructure Capital Advisors has compiled certain relevant resources on this topic, which can be found below. We will update this page as new resources and data becomes available.

 

Inflation Resources:

  1. A Broader Perspective on the Inflationary Effects of Energy Price Shocks – Research Dept. Working Paper No. 2224 – Dallas Fed*

  2. How Much Do Labor Costs Drive Inflation? by Adam Hale Shapiro, FRBSF Economic Letter, May 30, 2023*

  3. Oil Price Pass-Through into Core Inflation by Cristina Conflitti and Matteo Luciani, FEDS Notes*

  4. Economic Issues around the Inflation Target - https://www.piie.com/blogs/realtime-economic-issues-watch/case-raising-inflation-target-stronger-you-think

  5. Macro Effects of Inflation Target - https://www.imf.org/en/Publications/WP/Issues/2023/01/15/Macro-Effects-of-Formal-Adoption-of-Inflation-Targeting-528218

  6. Federal Reserves Current Framework - https://www.nber.org/papers/w26002

  7. Federal Reserve 2% Inflation Target - https://www.federalreserve.gov/faqs/economy_14400.htm

  8. European Central Bank Inflation - https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html

* Newly added resource links - June 26, 2023

 

Video Resources:

  1. YouTube Video Should the Fed stick with the 2 percent inflation target or rethink it? - https://www.youtube.com/watch?time_continue=1&v=V8hgP4qQoLA&embeds_euri=https%3A%2F%2Fwww.brookings.edu%2F&embeds_origin=https%3A%2F%2Fwww.brookings.edu&source_ve_path=MzY4NDI&feature=emb_logo

  2. YouTube Video Speech by Deputy Governor Paul Beaudry - https://www.youtube.com/watch?v=BA7DzD9CJ8w&embeds_euri=https%3A%2F%2Fwww.bankofcanada.ca%2F&feature=emb_logo

  3. YouTube Video The Drawing Board :: Independent Federal Reserve - https://youtu.be/Kj9-kRv0e6s

  4. CNBC Video Why the Federal Reserve aims for 2% inflation https://www.cnbc.com/video/2023/02/20/why-the-federal-reserve-aims-for-2percent-inflation.html

  5. TD AMERITRADE The Inflation Data Will Turn Around - https://tdameritradenetwork.com/video/the-inflation-data-will-turn-around



 

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Infrastructure Capital Advisors, LLC (ICA) is an SEC-registered investment advisor that manages exchange traded funds (ETFs) and a series of hedge funds. The firm was formed in 2012 and is based in New York City. ICA seeks current income opportunities as a primary objective in most, but not all, of ICA's investing activities. For more information, please reach out to Craig Starr at Craig.Starr@icmllc.com or 212-763-8336.

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