If you can’t raise the floor, why not just lift the ceiling?  Inflation remains stubbornly low, having undershot the Federal Reserve’s 2% annual target for more than four years. The longer that it stays low, the more likely it will keep weighing on inflation expectations, creating a feedback loop that is tough to break.  Friday’s inflation data aren’t likely to break that trend, further complicating matters as the debate rages...  If you can’t raise the floor, why not just lift the ceiling?  Inflation remains stubbornly low, having undershot the Federal Reserve’s 2% annual target for more than four years. The longer that it stays low, the more likely it will keep weighing on inflation expectations, creating a feedback loop that is tough to break.  Friday’s inflation data aren’t likely to break that trend, further complicating matters as the debate rages over the timing of the Fed’s next interest-rate increase. Economists polled by The Wall Street Journal estimate that consumer prices in August were 1% higher than a year earlier and 2.3% higher excluding food and energy. The latter would be tied for the highest reading since the financial crisis.  Mission accomplished? Not quite: The Fed’s preferred inflation indicator, the personal consumption expenditures price index, excluding food and energy, is up just 1.6% from a year ago. On Thursday, a separate report showed a gauge of wholesale prices, the producer-price index, was unchanged in August from a month earlier. And import prices also slipped last month.  Low inflation has put the Fed’s 2% target in the spotlight. One solution could be to raise the target. That would serve two purposes: lifting expectations of future prices and giving the Fed more firepower in the future. Higher inflation and a higher nominal interest rate would leave real rates unchanged but make future rate cuts more feasible.  In a paper last month, San Francisco Fed President John Williams touted the benefit of a higher target. And in a blog post this week, former Fed Chairman Ben Bernanke said it should be part of a broader discussion involving potential changes to the Fed’s policy framework.  A higher target could give market-based measures of expected inflation a boost. Take the so-called 10-year breakeven inflation rate. Measuring the yield spread between Treasury notes and Treasury inflation-protected securities, it currently reflects investors’ expectations of 1.49% annualized inflation on average over the next decade. It has remained below the Fed’s 2% goal since September 2014.  Sturdy job growth and rising household incomes suggest the economy is on solid footing. But until expectations of future inflation start picking up, the Fed will likely be in no rush to aggressively tighten monetary policy.  Write to Steven Russolillo at steven.russolillo@wsj.com
Stubbornly low inflation has prompted calls for the Fed to raise its target, Steven Russolillo writes. -- Ahead of the Tape