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ST. LOUIS (Reuters) - Sub-par inflation over the past five years has cost the U.S. economy nearly $1 trillion in nominal growth, St. Louis Fed President James Bullard said on Wednesday as he fleshed out a proposal for a more dynamic system of setting price increase goals.
Several policymakers are encouraging the U.S. central bank to review its method for controlling inflation and consider a system that makes up for weak inflation in one year by allowing prices to rise more quickly in future years so that the overall level, over time, stays on a set path.
Bullard said the Fed's inability to get inflation to its target over the past five years has allowed a 4.6 percent gap to emerge in where the economy, measured in nominal terms before adjusting for price increases, would have been otherwise. That amounts to more than $820 billion in an $18 trillion economy.
To compensate, the Fed would have to allow annual inflation of 2.5 percent for a decade - a sign of just how large the gap has become but also of how aggressive the central bank would have to be in its commitment to make up for it.
One of the criticisms of so-called price-level targeting is that it would require central bankers to not only convince politicians and the public that the higher inflation would improve the economy overall, but also that the level of price increases could be brought seamlessly back into line.
Bullard said shifting to such a system "would likely take a lot of preparation and debate."
(Reporting by Howard Schneider; Editing by Paul Simao)
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