2023-08-26 07:51:50
As the global economy heads into a gloomy autumn, the objective of bringing inflation down to 2% in the United States and the euro zone raises more and more questions. Voices, including Paul Krugman, Nobel Prize in economics, or Olivier Blanchard, former chief economist of the International Monetary Fund (IMF), have called in recent months on central banks to raise the inflation target from 2% to 3%. , to avoid “excessive” tightening that would plunge economies into recession.
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“In the fight against inflation, taking the last step, for example going down quickly from 4% to 2%, may be difficult”, underlines in particular Mr. Blanchard in an article published at the end of June and co-signed by Ben Bernanke, former chairman of the American Federal Reserve (Fed). The impact on the labor market, in particular, is likely to be deleterious.
The plea for raising the inflation target is based on one observation: since 2020, the date on which this figure of 2% was chosen as the inflation target by the Fed, the economy has changed. “The energy transition, the relocation efforts, the increase in the bargaining power of employees, the aging population, all of this plays in favor of spontaneous inflation above 2%”explains Patrick Artus, economic adviser to Natixis.
Based on no law
“If you want to keep a target of 2%, it means using extremely high real interest rates for a very long time. Not only is this very detrimental to growth, but also, for example, to investments in favor of the energy transition. »
The figure of 2% is all the more questioned by a number of economists since, although it is engraved in stone by the Fed and the European Central Bank (ECB), it is not based on any economic law. The central bank of New Zealand was the first to adopt this numerical target in the 1980s, at the end of a period of high inflation.
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It was then a question of giving substance to its credibility, by communicating around a clear objective, and of “anchoring” the expectations of economic agents – in other words, allowing banks, companies and even households to reason from of the same inflation scenario, in this case a reasonable scenario. “It wasn’t the most scientific process in the world”acknowledged Michael Reddell, a former economist at the Reserve Bank of New Zealand.
When they decided to match their mandate, namely the maintenance of price stability, with a quantified objective, both the Fed and the ECB also agreed on this figure of 2% inflation. Low enough to reassure, but high enough to allow a healthy functioning of the economy. Too low or zero inflation, in fact, entails the risk of a deflationary spiral, and deprives monetary policy of room for maneuver in the event of a slowdown, since it then becomes difficult to lower interest rates to restore a little boost to the economy.
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