In response to Tuesday’s Morning Jolt, some readers contended that the inflation rate of 3.5 percent, year over year, wasn’t so bad, and that people like me should stop comparing each month’s numbers to the Federal Reserve’s target rate of 2 percent, because that 2 percent goal is unrealistic.
First, for what it’s worth, new Fed chairman Kevin Warsh does not think it’s unrealistic. Testifying before the House Financial Services Committee this week, Warsh said, “What you heard at our first FOMC [Federal Open Market Committee] meeting, and I hope you heard today, is we’re committed to the Fed to deliver price stability. We’re committed to the 2 percent inflation goal. And so for businesses or households or market participants who came into this saying, ‘Well, they said before they were committed, but they seem to have tolerated a higher level of inflation,’ that commitment is resolute.”
Second, if the White House or anyone else in government thinks a 3 percent inflation rate is good enough, and that the days of 2 percent inflation are gone forever, they ought to level with the public and say so. Right now, the president is saying the opposite. “Now, inflation is way down, everything is great. We have — the prices are coming down.”
Back in 2023, Richmond Fed president Tom Barkin warned, “If you were to unilaterally declare that you’re not going to hit the target that you’ve set, then you are also declaring that you’re less credible in any target you set.”
Second, a 3 percent inflation rate has cumulative effects compared to a 2 percent one. As our John Puri wrote earlier this summer, “We can agree that 2 percent is an arbitrary target, but it’s much better than any higher one. Inflation at 2 percent means that the dollar loses half its value in 35 years. Inflation at 3 percent slashes that timeframe to 24 years.”
Put another way, if inflation is 2 percent for the next five years, a $100 grocery store run will cost $110.41 in 2031. If inflation is at 3 percent for the next five years, that $100 grocery store run will cost $115.93 in 2031.