The United States is a country that has long enjoyed the benefits of price stability. Getting used to moderate rates of inflation that were the major feature of the American economy, citizens of the United States are likely to criticize the Fed in case of failing to guarantee price stability. According to the recent data, there is a slight upturn in the inflation rate, which is caused by the instability in oil prices, changes in the real estate sector, an increase in wages, and weak productivity gains (Borowski & Didier, 2016). Still, in case of stabilizing oil prices, the Fed might meet the expected 2% inflation threshold.
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However, it is critical to remember that other factors mentioned above as well as affect the changes in inflation. For instance, the disinflationary influence of the strong dollar is likely to fade, thus leading to a slight increase in inflation. It can be explained by the fact that the dollar is not expected to appreciate after the two years of getting stronger – 2014-2016. More than that, the Fed expects that unit labor costs will go up by almost 3%, while labor productivity will continue to drop (Borowski & Didier, 2016). That said, due to the instability of these factors, the Fed should be ready for actual inflation rates that are higher than the expected once. In 2016, the institution forecasted the 1.6% growth of inflation. However, the actual pace was 1.7% (Borowski & Didier, 2016). Therefore, there is a question: why would the Fed decrease the expected inflation rate from 1.9% to 1.8%?
Given the abovementioned facts, the recommendation is to turn price stability into the primary objective of the Fed’s operations and policies to avoid the continuous increase in the inflation rate. The idea is to remind the Fed that it defined price stability as one of the core priorities. That is why it is critical to understand the importance of maintaining stable prices. First and foremost, it helps to improve the overall economic climate in the country by making the price mechanism more efficient and transparent. If people understand the formation of prices, they are likely to make adequate consumption and investment decisions, thus properly and beneficially allocating their resources. Moreover, price stability is meaningful for preventing distortions in deflation and inflation, which greatly affect the behavior of taxpayers both individual consumers and businesses. Also, it contributes to the country’s financial stability due to the potential allocation of additional resources to the financial sector and averting unproductive hedge activities. Finally, stable prices are the mechanism for adequate assessment of risks connected to exchange rates, which is as well connected to the inflation rate and affects businesses and consumers’ behavior (European Central Bank, 2017).
That said, it is recommended to pay specific attention to all manageable factors, which have a direct influence on changing the inflation rate. Still, it is essential to remember that even though oil prices are impossible to control at the national level, it is still possible to manage productivity gains, wages, and the real estate sector, and they should become the foundation of the new policy aimed at stability. For this reason, the primary focus should be made on statewide cooperation between local administrations and institutions that would lead to the national welfare and prosperity by overcoming the challenge of failing to establish an appropriate inflation rate and meet the determined threshold.
Borowski, D., & Didier, T. (2016). Is price stability in danger in the US? Web.
European Central Bank. (2017). Benefits of price stability. Web.