The 2 Percent Inflation Trap

David Glasner:

When the rate of unemployment is above the natural level, a short-run increase in inflation generates an increase in output and employment that is permanent, and therefore greater than the cost associated with a temporary increase in inflation. As the unemployment rate drops toward the natural level, the optimal level of inflation drops, so there is no reason why the public should anticipate a permanent increase in the rate of inflation. When actual unemployment exceeds the natural rate, inflation, under a strict Friedmanian analysis, clearly pays its own way.

But we are now trapped in a monetary regime in which even a temporary increase in inflation above 2-percent apparently will not be tolerated even though it means perpetuating an unemployment rate of 8 percent that not so long ago would have been considered intolerable. What is utterly amazing is that the intellectual foundation for our new 2-percent-inflation-targeting regime is Friedman’s natural-rate hypothesis, and a straightforward application of Friedman’s hypothesis implies that the inflation rate should be increased whenever the actual unemployment rate exceeds the natural rate. What a holy mess.

I'll throw out two reasons why people are afraid of going beyond 2 percent inflation.  Regular folks don't believe that they'll see wage inflation, but they will see price inflation.  That's been how things have worked whenever the Fed quantitatively eases.  The funds pour into commodities and drive up prices, but nobody gets a raise.  Meanwhile, with interest rates at zilch, bond investors don't want to see anything that will drive down prices on the bonds they're holding.  Double whammy, and no action.  Sure it's stupid, but I think that's what the issues are.