Inflation – Or Not

Both the Federal Reserve and the Biden administration, Jerome Powell and Janet Yellin, among others, respectively, want more inflation.  The Fed has changed its inflation target from a top of 2% to an average, over a period of time, of 2%.  Also, the Fed has indicated that, instead of reacting in advance of inflation exceeding 2%, it will now wait to act until after inflation has exceeded its 2% target.

For 40 years, inflation has not been a big deal.¹  The question is whether that will continue to be true in the future.  It may be that inflation is gone.  Or it may be, now that we have forgotten how bad inflation can be, that we won’t be careful about keeping inflation under control in the future, and that it will come back – good and hard.

James Mackintosh noted in “Streetwise” in Thursday’s Wall Street Journal:

“Since the global financial crisis policy makers have spent much more time worrying about inflation coming in below their targets than above.  But recently they have taken decisive steps away from the targets.  The Fed has adopted a new, softer target of average inflation of 2%, meaning it can overshoot for years to make up for the past decade’s misses. [emphasis in original]

Furthermore, it has shifted from focusing on trying to act in advance of inflation based on its forecasts, to waiting until inflation actually arrives.  With monetary policy’s effect on the economy famously having long and variable lags behind, as Milton Friedman emphasized, this raises the probability that the Fed acts too late to rein in rising inflation.”

On February 16, 2021, I wrote a post entitled “Got That Wrong: Inflation” about my worries concerning inflation in the past. Which never happened.  My concerns today could easily be misplaced, too.  It’s just that, having lived through the 1970s and early 1980s,² I may have a different view of inflation than people who did not.
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¹ In fact, there was a lot of money to be made on inflation’s way down.
² We bought a house in 1981 and got a mortgage with an interest rate of 13½% – and that was a reduced rate because we were, in buying the new house, paying off a mortgage we had with the same lender with an interest rate of 8½%.