Regional President Speech

Search Site Home > Newsroom > St. Louis Fed's Bullard Discusses Commodity Prices, In ation Measures, and In ation Targeting 5/23/2011 FARMINGTON, Mo. – Federal Reserve Bank of St. Louis President James Bullard delivered remarks titled “Commodity Prices, In ation Targeting, and U.S. Monetary Policy” on Monday as part of the Cozean Lecture Series, overseen by Mineral Area College Foundation. Bullard said ignoring energy prices in measures of in ation may understate the true in ation rate if rising energy prices represent a relative price shift for energy. In addition, he discussed headline and core in ation and stressed that the key policy goal with respect to prices is headline in ation rather than core. He also said that the Federal Open Market Committee (FOMC) “should de-emphasize core in ation in order to reconnect with households and businesses that experience important price changes every day.” Bullard brie y discussed the merits of commodity standards and in ation targeting, concluding that “in ation targeting is a better choice in the current environment.” With respect to monetary policy, “a pause allows more time to assess the strength of the economy,” he said. Commodity Prices While there have been substantial increases in commodity prices in recent months, Bullard noted that energy prices cannot continue to increase inde nitely. “Still, some sectoral prices do continuously move in one direction for a long time,” he added, citing two examples: prices for medical care, which have increased, and prices for computer technology, which have decreased. Bullard said that as the giant economies of Asia converge toward Western levels of real income per capita, “it is at least a reasonable hypothesis that global demand for energy will outstrip increased supply over the coming decades.” He added, “If that scenario unfolds, then ignoring energy prices in a price index may systematically understate in ation for many years.” Core vs. Headline In ation Bullard turned to a discussion of headline and core in ation measures, which refer to overall price index measures and measures without the food and energy components, respectively. He said core in ation is often smoother than headline in ation, but “the ‘core’ concept has little theoretical or statistical backing” and is very arbitrary. “Headline in ation is the ultimate objective of monetary policy with respect to prices,” Bullard said, noting that these are the prices that households actually pay. “Core is not an objective in itself,” he added. He said that while the only reason to look at core is as an intermediate target for headline, “its use as an intermediate target is questionable.” Bullard also said that too much attention to core in ation can mislead policy. For example, from 2003-2006, while core in ation averaged about 2 percent, it was consistently below headline in ation. “Core was not a good indicator of headline during this period,” he said. During those years, he added, energy prices were rising and the economy was expanding. Bullard cited his recent speech, “Measuring In ation: The Core Is Rotten,” and talked about how many of the older arguments in favor of a focus on core in ation have “rotted” over time. Therefore, he said, “U.S. monetary policy should de-emphasize core in ation, and increase the focus on headline in ation.” De-emphasizing core would “reconnect the FOMC with American households and businesses who know price changes when they see them.” In addition, Bullard said that the Fed lags behind many other central banks in adopting an explicit, numerical in ation target in terms of headline in ation. “The FOMC should adopt such a target,” he said. Having an explicit target for headline in ation “would allow discussion of other measures of in ation in the context of a clearly stated ultimate goal with respect to the price side of the dual mandate.” Commodity Standards and In ation Targeting Although commodity standards were last discussed in the 1970s when U.S. in ation was high and variable, Bullard noted that today, in ation is quite low. He said, “Tying the currency to commodities when commodity prices are highly variable is questionable.” While a commodity standard forces some accountability on the central bank, in the past “it did not always work because governments sometimes changed the rate between the commodity and the currency,” Bullard said. “In ation targeting is another way to force more accountability to the central bank and anchor longer-term in ation expectations,” he said. “Make the central bank say what it intends to do, and hold the central bank accountable for achieving the goal.” “In this sense, in ation targeting is the modern successor to a commodity standard,” Bullard said. U.S. Monetary Policy Bullard also discussed monetary policy after the Fed’s current quantitative easing program ends. “Past behavior of the FOMC indicates that the Committee sometimes puts policy on hold,” he said. He noted that hold in the current environment would mean: the policy rate remains near zero; the “extended period” language remains intact; and the balance sheet remains at the level as of the time of the decision to go on hold. A pause “gives the Committee more time to assess economic conditions,” Bullard said. GENERAL Home About Us Bank Supervision Careers Community Development Economic Education Events Inside the Economy Museum Newsroom On the Economy Blog Open Vault Blog OUR DISTRICT Little Rock Branch Louisville Branch Memphis Branch Agricultural Finance Monitor Housing Market Conditions SELECTED PUBLICATIONS Bridges Economic Synopses Housing Market Perspectives In the Balance Page One Economics The Quarterly Debt Monitor Review Regional Economist ST. 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James Bullard (2011, May 22). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20110523_james_bullard

@misc{wtfs_regional_speeche_20110523_james_bullard,
  author = {James Bullard},
  title = {Regional President Speech},
  year = {2011},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20110523_james_bullard},
  note = {Retrieved via When the Fed Speaks corpus}
}