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Charting the Fed’s Record on Inflation: A Big Gap

Ever since the Fed announced an explicit 2% inflation target, actual inflation has fallen short. This chart shows the widening gap.

The Federal Reserve since January 2012 has said it is targeting 2% inflation. How has it done? Not so well, as shown in the chart.

In the 20 years before the Fed said it was targeting inflation, it did a great job: On average, inflation was exactly 2% from 1992 to 2012. Since 2012, inflation has consistently fallen short of the Fed’s target and today stands a full 3.8% below the path for the U.S. PCE index that would be consistent with 2% inflation, indicated by the blue line. (The Fed prefers to monitor personal consumption expenditures, or PCE, while the press reports on the U.S. Consumer Price Index.)

Why does this matter? It helps to account for the Fed’s focus on a “gradual” pace of normalizing interest rates.

Several Fed officials have said they would like to run the economy at least a little “hot,” which is Fed-speak for allowing inflation to overshoot the 2% target. But at the press conference for the December 2016 meeting, Chair Yellen asserted that she was not in favor of running a “high pressure economy” or trying to overshoot the 2% inflation target.

As the chart shows, if the Fed wanted to make up for its inflation undershoots since 2012, it would have to engineer and tolerate inflation of at least 3% for three years. Will the Fed go that far? Likely not.

But so long as the pattern in the chart holds, the Fed will be wary of hiking too fast while inflation expectations continue to fall short of the 2% target.  

The Author

Richard Clarida

Former Global Strategic Advisor, 2006-2018

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Richard Clarida

Dr. Clarida is a managing director in the New York office and PIMCO's global strategic advisor.


This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2017, PIMCO.