The "Oops I Did It Again" theory of inflation

Roberto Rigobon, professor at the MIT Sloan School of Management, has coined the Britney Spears Theorem of inflation. Read why it matters for securities finance.

According to a recent interview posted in MIT News, Rigobon comments on the argument that the Fed should move from 2% target inflation to 4%.

“There are two ways of getting 4 percent inflation. One is saying you want to deliver 4 percent. Another is saying you are protecting against inflation, but that suddenly we have 4 percent. And you say, “Oops, I did it again.” That’s the Britney Spears part. It’s way more effective to say your long-term goal is 2 percent. If I change the long-term target to 4 percent, it might affect bond prices and expectations. I want bond markets to know it’s going to be 2 percent in the long term, but it won’t be 2 percent next month, and in the short run, because we’re going through this process, so I will allow it to get higher. If that means 4 percent for six months, or 3 percent for nine months, nobody knows for sure. But I think everybody who is not too attached to ideology will agree with Olivier that it would be healthy to free that target. I mean, in Europe, it’s 1 percent. You have to be kidding me. Now it’s very interesting, because the Germans have an objective of 1 percent, and they have had 2 percent inflation for six months. So they are doing the Britney Spears thing. In Britain the target is 2 percent, and since February the rate has been 4 percent.”

How inflation is managed has significant implications for the world of securities finance. Inflation and interest rate watchers should keep a close eye out for the Britney Spears Theorem in action.

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