Ms Mees in this Vox article released today seems to think the Fed should emulate the ECB and “target” headline inflation. Her main argument:
Relying on core inflation instead of headline inflation, as the Fed does, is justified in case core inflation is a better predictor of headline inflation than headline inflation itself. Core goods and services tend to be subject to nominal price rigidities, while non-core goods, like agricultural commodities, oil, natural gas etc., have their prices set in auction markets.
For much of the 20th century, core inflation has been both less volatile and more persistent than the inflation rate of non-core goods. However, the integration of China and India in the global market added more than 2.3 billion consumers and producers to the global economy. They entered as suppliers of core goods and services and as demanders of non-core commodities. The result has been a major, persistent, and continuing increase in the relative price of non-core goods to core goods (Buiter 2008).
Ms Mees, like a bunch of other people, apparently think inflation is a “price phenomenon”, so that an increase in a subset of prices is a danger signal. Relative price changes often take place, sometimes due to supply factors (a reduction in the supply of energy like in the 1970´s, for example) sometimes due to demand factors (an increase in demand for “non core” goods due to the “integration of China and India in the global economy”).
In the 1970´s, the Fed accommodated the relative price rise with expansionary monetary policies – viewed as a rising trend in nominal spending). At present, nominal spending is way below the trend level path, indicating monetary policy is “tight”. So Ms Mees and her “think alike” group want the Fed to “tighten” even more!
The real lesson: stop targeting rates – inflation and interest rates. Target NGDP – nominal spending – level target instead.