The Bureau of Labor Statistics said this week that the inflation rate for all products was a flat 0.0 percent in July, raising expectations that the Federal Reserve will act to boost the economy next month.
Excluding food and energy prices, as economists frequently do when calculating the core rate of inflation, the consumer price index in July was 0.1 percent. Inflation for the past 12 months was 1.4 percent, and core inflation was 2.1 percent.
Inflation as measured by the index has been below the Fed’s target of 2 percent annually since April and fell below that level for all but three months between November 2008 and February 2011.
Another measure of inflation known as ‘‘personal consumption expenditures,’’ a measure favored by the Fed, was below 2 percent for all of 2009 and much of 2010 and stands at 1.6 percent.
The Fed, in short, has been consistently undershooting its inflation target.
Fed policy makers said after their most recent session that they would continue to monitor the economy and consider taking action to stimulate growth at their next meeting, in September, provided there is no sign of inflation. Economists have projected that the Fed might resume buying government and housing debt to help push down interest rates.
Since 1978, the Fed has been tasked by Congress not just with maintaining stable prices but also with keeping unemployment low. The Fed has been even further off its goals there. The Congressional Budget Office has estimated that the unemployment gap — the amount that unemployment exceeds the rate expected when the economy is performing normally — was 3.3 percentage points in 2009, 4.3 in 2010, and 3.7 in 2011. If the Fed were hitting its desired unemployment level, that number would be zero.
Some economists have argued that the Fed, by continuing to undershoot its inflation and employment targets, is undermining its credibility while failing to spur an adequate recovery from the recession.
They argue that a bout of inflation could help the economy, at least in the short term. The idea is that inflation makes cash worth less, which spurs consumers and businesses to spend it before it loses more value. That process could lead to more hiring and growth.
There are a number of ways the Fed could go about allowing higher inflation. One would be to state that the 2 percent target is really a target, not a ceiling, and indicate that Fed policymakers want the rate to rise from 1.4 percent to 2 percent. The Fed would then buy assets until that rise occurs, or simply allow inflation to rise on its own as the markets respond. It could also set a higher inflation target, perhaps 4 percent.
Another option, proposed by Harvard University professor and Mitt Romney campaign adviser Greg Mankiw, would be to change from ‘‘rate targeting’’ to ‘‘level targeting.’’ Under this approach, the Fed would aim for an average annual inflation rate of 2 percent but commit to higher inflation in a given year to make up for low inflation in the previous year, or lower inflation in a given year to make up for high inflation in the previous year.