Inflation is finally falling. Although the year-over-year inflation rate is still over 4%, well above the Federal Reserve’s 2% target, much of that reflects especially large price increases from last summer. As those unusual months cycle out of the data, the rate will likely keep dropping.
With inflation trending down, but not yet at target, some notable economists including Nobel laureate Paul Krugman and Moody’s Analytics’ Mark Zandi have questioned whether the Fed should even worry about the target. In their view, getting all the way down to 2% could threaten the strong labor market. This is not a new perspective. Over the years, many economists have argued that a slightly higher inflation target could actually be a good thing.
We should reject these arguments. A higher target is harmful and unnecessary for the Fed to do its job of promoting full employment and price stability.
