Targeting the Price Level?

Eric Rosengren, president and CEO of the Boston Fed, opened today the conference I am attending with his views on the challenges of monetary policy in the current environment. Here is a slide that I found interesting: if you plot the level of prices for the Fed and the ECB since 1993 and compare it to a line that represents a 2% growth (inflation), the three lines almost look identical.

Temporary deviations from the 2% path seem to be corrected over time as if these central banks were targeting a certain path of the price level and not just inflation -- i.e. when inflation is higher than the target it is followed by a period of lower inflation so that the price level returns towards its trend. This is not completely surprising given how anchored inflation and inflation expectations have been in these 20 years but it is interesting how tight the fit is. Of course, this is not the case in Japan where prices have been flat over the same period.

The whole set of slides as well as the transcript of his speech can be found at the conference web site.

Antonio Fatás