Weekend Economists: See the Kittehs! May24-27, 2013

[Demeter]

109. The Case for 4% Inflation

http://www.nakedcapitalism.com/2013/05/the-case-for-4-inflation.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29


Yves here. Some readers are likely to recoil at the idea that more inflation might be a good thing. But the flip side is that economists are still fighting the war of the 1970s. The 1970s stagflation was the result of a specific set of conditions that look very remote now: a recent past of budget deficits when the economy was already strong leading to currency depreciation (Nixon going off the gold standard) which also hurt the Saudis (who lost out because oil was denominated in dollars), leading them to retaliate with oil price increases. And because labor had bargaining power, unlike now, the combination of too much unintended stimulus (the deficits were the result of an unwillingness to raises taxes, since they’d perceived to be the result of needing to fund the unpopular Vietnam War) plus a commodities shock led not just to inflation, but an increasing rate of inflation.

What makes inflation hated now is that workers have no leverage, so stagnant wages plus inflation means a declining standard of living. Similarly, an increase in the level of inflation hurts investors. But if an inflation rate is not terribly high and doesn’t rise, bond yields and securities prices will adjust to reflect that level of inflation. In other words, what hurts workers is when pay increases lag inflation in a meaningful way, and when investment returns don’t include an adequate inflation premium...

LONG POSTED TECHNICAL ARTICLE WHICH CONCLUDES:

Conclusion

Since the double-digit inflation of the 1970s, central banks have sought to reduce inflation and keep it low. Recent history teaches us that inflation has fallen too low. Raising inflation targets to 4% would have little cost, and it would make it easier for central banks to end future recessions.