Does Our Economy Need More Inflation?

The lead story in this week’s Economist, “The Perils of Falling Inflation” and a recent article in the New York Times, “In Fed and Out, Many Now Think Inflation Helps“, both make the case that the U.S. core inflation rate of 1.2%, excluding food and energy prices, is dangerously low, risking deflation.  “Rising prices help companies increase profits; rising wages help borrowers repay debts.  Inflation also encourages people and businesses to borrow money and spend it more quickly.”
But there is another distinctly different point of view.  In a Barron’s column last week “Deflating the Inflation Myth”, Gene Epstein points out that “business activity is motivated by profit, not prices.”  He shows with a chart that profits decreased during the highly inflationary 1970’s and 1980’s but they have been increasing since the end of the recession in 2009, even with very low inflation.  The key to boosting the economy is more business investment and risk taking but a higher rate of inflation is not the way to accomplish this.
In a speech at the Economic Club of New York in June of this year, former Fed Chair Paul Volcker said that “the implicit assumption behind that siren call (to let inflation increase) must be that the inflation rate can be manipulated to reach economic objectives – up today, maybe a little bit more tomorrow, and then pulled back on command.  All experience amply demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse.”
As soon as interest rates go up as they surely will in the not too distant future, interest payments on our now enormous national debt will skyrocket and become a huge drag on the economy.  If and when inflation goes up, it will pull interest rates up along with it.  Let’s not push inflation, and therefore interest rates, up any faster or higher than necessary!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s