Inflation is too low; how does it get too high?
â€śInflation can be too low as well as too high.â€ť That was Fed governorÂ Jerome Powellâ€™s warning back in June. The data show that, based on the Fedâ€™s own target of 2%, inflation is too low:
An interesting question is why post-crisis inflation has been so low, and what causes high inflation. Hereâ€™s a rundown of some of the debate.
Low inflation doesnâ€™t seem to be for lack of effort
Mike Konczal made anÂ important point in June. â€śInflation is collapsing in 2013â€ť, he wrote, despite the fact that â€śthe Federal Reserve took extraordinary actions at the end of last year to hit its inflation target… The fact that inflation is falling even when more action is being taken should have us questioning whether a 4% move would have any tractionâ€ť.
With that for context, thereâ€™s been an interesting debate over the last week about the origins of inflation in the 1970s, a time when 4% inflation would have been joyously embraced (instead it whipsawed from the mid-teens to mid-single digits and back again).
What if inflation is caused by factors the Fed canâ€™t address?
Steve WaldmanÂ started the debate by asserting that â€śthe great inflation [of the 1970s] was not at root a monetary phenomenonâ€ť:
The baby boom came of age at the same time as shifting norms about women and work dramatically increased the proportion of the population that expected jobs. The â€śmalaiseâ€ť of the 1970s was not a problem with GDP growth…. It was the people wut done it, by being born and wanting jobs.
Counterpoint: central bankers can screw up and cause too-high inflation
Scott SumnerÂ objects to the idea that demographics caused 1970â€™s inflation and writes that, in his view, the Fed allowed â€śpointless inflation that doesnâ€™t lower unemployment at allâ€ť and stands firmly by the idea that central bankers werenâ€™t circumscribed by population factors beyond their control. Instead, they simply made errors and â€śwere often cluelessâ€ť.
High inflation can be the best-of-the-worst choice
Karl SmithÂ takes a look at the actions of Arthur Burns, the man who ran the Fed in the 1970s, and concludes that he was actually very clued-in:
His general take seemed to be that unemployment was poisonous to the social fabric and that the social fabric was already strained, most notably by race relations. Further he felt that efforts to restrain inflation would be useless unless the power of the labor unions was broken. However, most of all he seemed to believe that the effect of monetary policy depended on the institutional framework of the nation and that this was in flux. Reading somewhat between the lines it seems he felt the worst of all possible outcomes would be that a leftist government would come to power and then render any attempt to control prices or sustain business confidence untenable.
Thatâ€™s a fascinating view of monetary policy as being informed by a deep understanding of long-term cultural and social changes as much as economic data. (Relatedly, hereâ€™s theÂ academic paperÂ that jumpstarted Smithâ€™s post).
Maybe growth and inflation seem to go together
Tyler CowenÂ looks globally and finds evidence that high growth and high inflation seem to appear in tandem, because inflation isnâ€™t unpopular when wages are increasing, and because the credit supply is linked to future, not present, growth.
And back to demographics: old people love low inflation
Ryan AventÂ thinks that itâ€™s difficult to separate cause and effect when looking at demographics and inflation, because â€ścausation runs in both ways… and the key takeaway is the relationship between ageing and (dis)inflationâ€ť:
I’m a bit taken with the idea of high inflation as the fruit of a young, optimistic economyâ€”and of low inflation or deflation as the choice of economies in the twilight of life, excessively cautious, with an eye on the past rather than the possibilities of the future… One starts to wonder whether a society, or a monetary regime, that always advantages the economic interests of the young isn’t preferable to one that simply caters to the modal generation across its life-cycle.
From that perspective, maybe low inflation is a greater threat to Americaâ€™s future thanÂ the national debt.