I did not understand this, sorry: "I think it’s still likely that the burst of inflation we’re seeing is temporary — in fact, that we’ll be seeing inflation below the 2% target next year, in year-over-year terms, if policy settings remain where they are."
I don't quite understand the current behavior of inflation, other than it's consistent with what we've seen with big changes in the relative price of crude oil in the past. You might think that, with an increase in the relative price of oil, that the price of oil in dollars goes up, and other prices in dollars go down, but typically price indices have gone up, in the past. What's going on here is a sectoral phenomenon, which is presumably related. But, I'm thinking that those sectoral effects are level effects, and that by next year, inflation will fall in with what we typically see in low-nominal-interest-rate economies. That is, if nominal interest rates stay low into the middle or the end of 2022, we'll see inflation below target.
Oh, I see. So you are still worried about downside risk on inflation and the Fisherian approach is pushing you to increase policy rates. Perhaps I would not use the word "thighten" then (in the last line). It sounds more like "normalization of rates"?
Exactly. Given the practicalities of policymaking, which includes resistance to the view that Fisher effects are important, I think the idea is that the interest rate target should go up whenever you have an excuse to do it, as long as the current nominal rate is lower than what you think is consistent with hitting the inflation target in the long run.
I did not understand this, sorry: "I think it’s still likely that the burst of inflation we’re seeing is temporary — in fact, that we’ll be seeing inflation below the 2% target next year, in year-over-year terms, if policy settings remain where they are."
I don't quite understand the current behavior of inflation, other than it's consistent with what we've seen with big changes in the relative price of crude oil in the past. You might think that, with an increase in the relative price of oil, that the price of oil in dollars goes up, and other prices in dollars go down, but typically price indices have gone up, in the past. What's going on here is a sectoral phenomenon, which is presumably related. But, I'm thinking that those sectoral effects are level effects, and that by next year, inflation will fall in with what we typically see in low-nominal-interest-rate economies. That is, if nominal interest rates stay low into the middle or the end of 2022, we'll see inflation below target.
Oh, I see. So you are still worried about downside risk on inflation and the Fisherian approach is pushing you to increase policy rates. Perhaps I would not use the word "thighten" then (in the last line). It sounds more like "normalization of rates"?
Exactly. Given the practicalities of policymaking, which includes resistance to the view that Fisher effects are important, I think the idea is that the interest rate target should go up whenever you have an excuse to do it, as long as the current nominal rate is lower than what you think is consistent with hitting the inflation target in the long run.