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:
How Much Do Labor Costs Drive Inflation? by Adam Hale Shapiro, FRBSF Economic Letter, May 30, 2023*
Oil Price Pass-Through into Core Inflation by Cristina Conflitti and Matteo Luciani, FEDS Notes*
Economic Issues around the Inflation Target - https://www.piie.com/blogs/realtime-economic-issues-watch/case-raising-inflation-target-stronger-you-think
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
Federal Reserves Current Framework - https://www.nber.org/papers/w26002
Federal Reserve 2% Inflation Target - https://www.federalreserve.gov/faqs/economy_14400.htm
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:
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
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
YouTube Video The Drawing Board :: Independent Federal Reserve - https://youtu.be/Kj9-kRv0e6s
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
TD AMERITRADE The Inflation Data Will Turn Around - https://tdameritradenetwork.com/video/the-inflation-data-will-turn-around
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