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CAMBRIDGE – Empirical relationships in economics are sufficiently fragile that there is even a “law” about their failure. As British economist Charles Goodhart explained in the 1980s, “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Central banks in advanced economies have recently been providing a few more case studies confirming Goodhart’s Law, as they struggle to fulfill their promises to raise inflation to the stable plateau of their numerical targets.
Major central banks’ fixation on inflation betrays a guilty conscience for serially falling short of their targets. It also raises the risk that in fighting the last war, they will be poorly prepared for the next – the battle against too-high inflation.
Consider the United States Federal Reserve, which at the beginning of 2012 quantified its Congressional mandate of “promoting maximum employment, stable prices, and moderate long-term interest rates.” These goals would be best achieved by keeping inflation, measured by the Fed’s preferred personal consumption price index, at 2% in the long run. Since then, the four-quarter growth in that index has been below this target in every quarter but one, as Fed forecasts of inflation consistently fell short of the mark. Goodhart’s Law still has teeth.
The Fed’s solution to this failure, like that of other central banks, has been to talk more about the subject. The minutes of the January meeting of the Federal Open Market Committee (FOMC) reveal an extensive discussion among policymakers about how to determine US inflation.
…click on the above link to read the rest of the article…
CAMBRIDGE – The price at the pump for premium gasoline topped $3 per gallon in much of the United States over the past few weeks, which is surprising to consumers but not to analysts of the world’s oil markets. From its local low two years ago, the price of oil has more than doubled. As with any market, where you stand on this price increase depends on where you sit.
Higher oil prices buttress the fortunes of producers abroad and at home. The International Monetary Fund upgraded the GDP growth outlook of all six of the top ten oil producers that were shown separately in its 2018 forecast update, and the projected growth of world trade volumes was raised half a percentage point this year and next. Increased oil revenues improve the fiscal positions of most producing economies, and some have taken advantage of global investors’ hardier appetite to issue sovereign debt.
In the US, the five states with the largest gains in oil production this decade recorded employment growth of 2.75% in 2017, double the national average. Meanwhile, the number of oil rigs nationwide increased by roughly 50%.
At the same time, a doubling of energy costs takes a significant bite out of US households’ budgets, with energy costs directly accounting for about 6.5% of consumer spending. Even more problematic, this is a regressive tax, disproportionately draining lower-income households’ discretionary spending power.
…click on the above link to read the rest of the article…
CAMBRIDGE – Empirical relationships in economics are sufficiently fragile that there is even a “law” about their failure. As British economist Charles Goodhart explained in the 1980s, “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Central banks in advanced economies have recently been providing a few more case studies confirming Goodhart’s Law, as they struggle to fulfill their promises to raise inflation to the stable plateau of their numerical targets.
Major central banks’ fixation on inflation betrays a guilty conscience for serially falling short of their targets. It also raises the risk that in fighting the last war, they will be poorly prepared for the next – the battle against too-high inflation.
Consider the United States Federal Reserve, which at the beginning of 2012 quantified its Congressional mandate of “promoting maximum employment, stable prices, and moderate long-term interest rates.” These goals would be best achieved by keeping inflation, measured by the Fed’s preferred personal consumption price index, at 2% in the long run. Since then, the four-quarter growth in that index has been below this target in every quarter but one, as Fed forecasts of inflation consistently fell short of the mark. Goodhart’s Law still has teeth.
The Fed’s solution to this failure, like that of other central banks, has been to talk more about the subject. The minutes of the January meeting of the Federal Open Market Committee (FOMC) reveal an extensive discussion among policymakers about how to determine US inflation.
…click on the above link to read the rest of the article…