Jim Hamilton argues that the Fed should adopt an inflation target to get to grips with the current economic situation in the US. This is interesting. Norway’s central bank officially adopted an inflation target of 2.5% in, I think, 1999. Jim has earlier made it clear that the standard measures the Fed usually use to govern the economy is failing; I reported on this earlier. Jim describes inflation targeting as ‘Plan C,’ and discusses why previous plans have failed. The reason why he sees it necessary to dig deep is the latest report on the Consumer Price Index. The report is dramatic; it shows that prices fell by 1% in October. It may sound innocent, but it amounts to 12% over a year. And it may get worse before it gets better. Jim admits that the Fed is running out of options, but he also thinks targeting inflation is a powerful measure that will work;
Targeting inflation is not just another arrow in the quiver; it’s a bazooka, at least for purposes of preventing deflation. Time to take aim and fire.