The “Inflation obsessed”

In a interview, Narayana Kocherlakota said he expected “a big upward movement” in core inflation—inflation excluding volatile food and energy prices—from about 0.8% late last year to about 1.3% by year-end.

This is an excerpt from the interview with Kocherlakota. At the end we read:

KOCHERLAKOTA: If you make the assumption that at the end of 2010 that policy was appropriately accommodate, so neither too loose nor too tight, then you see core inflation go up by 50 basis points over the course of 2011, the usual response to that we know from 20 years of thinking about monetary policy or even more is to raise the target rate by even more than that increase in observed inflation. So that would mean you should raise your target rate by more than 50 basis points. The usual number is a 1.5 coefficient that Taylor has, so that would be 75 basis points. So this is saying that if you take monetary policy as being appropriate, just right at the end of 2010, then at the end of 2011 if you see this increase in inflation you should be responding to it by raising rates.

(Editor’s Note: By Taylor, Mr. Kocherlakota is referring to the Taylor Rule, a widely used rule of thumb for monetary policy used by Stanford professor John Taylor.)

WSJ: Even if inflation is only going to 1.3%

KOCHERLAKOTA: Because if it was appropriate at 0.8%, if inflation has gone up, it is no longer appropriate. Now, there is enough uncertainty about output gaps that you don’t want apply anything as mechanistically as what I’ve just described. But it does make you think that there might be a reason to tighten by the end of the year.

WSJ: I want to connect this to your forecast. You are also saying that you see growth now maybe in the 3% to 3.5% range. It doesn’t sound like that is going to do much to reduce the slack that exists in the economy. Why would you want to want to tighten policy in an environment where the economy is just going around trend?

KOCHERLAKOTA: We have a highly accommodative policy in place to deal with a large amount of slack but also to deal with where inflation was at the end of last year. If that inflationary factor changes you have to change policy in response.

How cynical can you get? In his presentation in Marseille on March 25th he said:

“The bubble collapse has no impact on unemployment or output, given sufficiently accommodative monetary policy,” the bank president said, referring to an economic model in the text prepared for a speech today in Marseille.

And I conjectured that:

But maybe he´s just talking about what should have been done. But since it wasn´t, now “it´s too late” because inflation will “take off”.

It seems I was right!

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