The CPI numbers have crossed the magic 2% number that the Federal Reserve aims for.
The Federal Reserve claims they try to target the PCE which has not yet crossed the 2% threshold.
In reality, they watch all of these numbers carefully. The Federal Reserve wont start to get concerned about inflation until the CPI crosses the 3% or maybe even 4% threshold.
Why 2%
No one challenges the FOMC members about why they target 2%. At their website, they make the claim that 2% promotes economic growth. They offer no evidence of this.
The origin of this crackpot idea comes from Milton Friedman. Friedman was heavily influenced by Irving Fisher. Fisher is famous for going broke in the 1929 crash and a few days before the panic stated that stock prices had “reached what looks like a permanently high plateau.”
In ‘Capitalism and Freedom’, Friedman states the following:
My choice at the moment would be a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money. For this purpose, I would define the stock of money as including currency outside commercial banks plus all deposits of commercial banks. I would specify that the Reserve System shall see to it that the total stock of money so defined rises month by month, and indeed, so far as possible, day by day, at an annual rate of X percent, where X is some number between 3 and 5. The precise definition of money adopted, or the precise rate of growth chosen, makes far less difference than the definite choice of a particular definition and a particular rate of growth.
Later in life he altered his view and favored 2% instead of his 3-5%. The last sentence in the quote above is so absurd its hard to believe anyone would write down such a thing. Words must be defined. Friedman did an intellectual punt. The Friedmanites never did zero in on one definition of the money supply figure.
In ‘The Mystery of Banking’, Rothbard answers the question: what should the supply of money be?
What should the supply of money be? What is the “optimal” supply of money? Should M increase, decrease, or remain constant, and why?
This may strike you as a curious question, even though economists discuss it all the time. After all, economists would never ask the question: What should the supply of biscuits, or shoes, or titanium, be? On the free market, businessmen invest in and produce supplies in whatever ways they can best satisfy the demands of the consumers. All products and resources are scarce, and no outsider, including economists, can know a priori what products should be worked on by the scarce labor, savings, and energy in society. All this is best left to the profit-and-loss motive of earning money and avoiding losses in the service of consumers. So if economists are willing to leave the “problem” of the “optimal supply of shoes” to the free market, why not do the same for the optimal supply of money?
In a sense, this might answer the question and dispose of the entire argument. But it is true that money is different. For while money, as we have seen, was an indispensable discovery of civilization, it does not in the least follow that the more money the better.
Consider the following: Apart from questions of distribution, an increase of consumer goods, or of productive resources, clearly confers a net social benefit. For consumer goods are consumed, used up, in the process of consumption, while capital and natural resources are used up in the process of production. Overall, then, the more consumer goods or capital goods or natural resources the better.
But money is uniquely different. For money is never used up, in consumption or production, despite the fact that it is indispensable to the production and exchange of goods. Money is simply transferred from one person’s assets to another. Unlike consumer or capital goods, we cannot say that the more money in circulation the better. In fact, since money only performs an exchange function, we can assert with the Ricardians and with Ludwig von Mises that any supply of money will be equally optimal with any other. In short, it doesn’t matter what the money supply may be; every M will be just as good as any other for performing its cash balance exchange function.
…But isn’t it necessary, one might ask, to make sure that more money is supplied in order to “keep up” with population growth? Bluntly, the answer is No. There is no need to provide every citizen with some per capita quota of money, at birth or at any other time. If M remains the same, and population increases, then presumably this would increase the demand for cash balances, and the increased D would…simply lead to a new equilibrium of lower prices, where the existing M could satisfy the increased demand because real cash balances would be higher. Falling prices would respond to increased demand and thereby keep the monetary functions of the cash balance exchange at its optimum. There is no need for government to intervene in money and prices because of changing population or for any other reason. The “problem” of the proper supply of money is not a problem at all.