The US election highlights a surprising fact: voters care more about prices than inflation or unemployment. This is not just a US phenomenon; similar economic concerns about prices led to the downfall of incumbent administrations in the UK and France. Inflation targeting has failed electorates as real wages have struggled to keep pace with elevated price levels.
The pandemic price shock was not transitory, and supply pressures eased, but household costs continued to rise. The prices of food, petrol, and other essential goods increased by 28% in the US since January 2020, while in the UK, they rose by 30%. In the Eurozone, the European Central Bank’s index shows a 26% increase. This has left households struggling.
Policymakers may take away several lessons from these outcomes. They should focus on headline inflation rather than “core” prices, as current policy targets are ignoring the prices that matter most for people. A more fundamental change is needed: adopting price-level targeting, which aims to achieve constant price growth, not just low inflation rates.
This alternative framework could deliver gains for consumers by encouraging early action to limit initial divergence from desired price levels. However, the current inflation targeting regime has also led to squeezing real labour incomes, contributing to income inequality and fueling populism. Policymakers must reconsider their mandates to remain relevant and address voter concerns.
Source: https://www.ft.com/content/fb325e0f-f344-4c09-a23b-15cb0de149d1