And so we welcome Tim Duy to the Department of Economics at Miskatonic University, where we ululate nightly beneath the dead uncaring stars…
Tim Duy:
The Disingenuous James Bullard: St. Louis Federal Reserve President James Bullard… fears that inflation expectations are becoming unglued…. I just can't let this one go. I honestly don't know if I should laugh or cry. I have a whole new respect for Federal Reserve Chairman Ben Bernanke if this is any indication of the kind of grief he needs to deal with on a regular basis…. TIPS returns are based on CPI inflation, not the Fed's PCE inflation target…. Bullard should know this. If he does, he is deliberately misleading his audience. If he doesn't… To understand why the TIPS breakeven rate will be above the Fed's PCE inflation target, simply note that CPI inflation tends to run above PCE inflation, on the average of about 44bp since 1990.
The second reason… is… Bullard begins his chart at the beginning of this year, leaving the audience to believe that these high inflation expectations are a new phenomenon…. Nothing to see here, folks. Move along.
Bullard starts down this path as a response to suggestions for higher inflation to reduce real debt burdens…. Bullard wants to pretend that the only costless option is the strict low inflation option. That's simply not true. It has a cost as well, in a particular distribution of winners and losers. A higher inflation target will result in a different distribution….
Bottom Line: If Bullard wants to take a hard line against higher inflation, so be it…. But don't pretend that not pursuing the inflation option is costless… And please don't use an obviously disingenuous data analysis to fuel inflation fears. We expect better from our policymakers. Or at least we should.
