The Price Level Shortfall

Had we run a 2% price level target since December 2007 (the beginning of the previous recession).

Figure 1: Personal consumption expenditure price level, chain-type (black), 2% target from 2007M12 (red), and CBO projection (teal). CBO monthly data interpolated from quarterly using quadratic match. 2% in log terms. Source: BEA via FRED, CBO (February 2021), and author’s calculations.

The shortfall is 6.9% as of January 2021 (% in log terms), and projected to widen to 7.7% as of December 2025. The February 2021 CBO projection omits the likely passage of the American Recovery Act, but does include the previous approximately $4 trillion in Covid-19 related expenditures.