The low level of US inflation may reflect luck and structural economic change, not just good monetary policy, Federal Reserve Governor Donald Kohn said on Thursday as he called for work on improving inflation models.
"Luck as well as structural changes in the economy may have had a lot to do with the current low level and apparent stability of US inflation," Kohn said in remarks prepared for delivery to a Fed-hosted conference on inflation dynamics.
"If so, and if our luck turns and we experience a series of adverse shocks, our ability to formulate policies that deliver sound performance may depend upon a much better understanding of the inflation process," he added.
"Even if it is true that things tend to turn out OK on average under the present state of knowledge, macroeconomic performance could be better yet if policy-makers were able to take advantage of a fuller understanding of the dynamics of the economy," Kohn said.
Kohn did not address the outlook for the US economy or monetary policy, but he did touch on a number of areas of concern to policy-makers as they wrestle with persistently high energy prices.
One "critical issue for monetary policy right now," Kohn said, was the question of why energy prices have had less of a feed-through to other prices in the past two decades than previously.
He asked rhetorically whether that might reflect the public's expectation that the central bank will be able to keep inflation low, or whether it was simply because most energy price movements since the 1970s have proved fleeting, leading businesses to be less concerned about jacking up prices to recoup their costs.
"We really know very little about the precise manner in which (investors, households and businesses) form their beliefs about the future, in part because of a lack of comprehensive data on (inflation) expectations," Kohn said.