Photo: Graphic by Gus Lubin
Paul Krugman continues to observe that those who have been doom-mongering about inflation since the financial crisis have been dead wrong.The brief spike in inflation we’ve seen over the last couple of years–which some Fed critics immediately viewed as the beginning of the end–has again subsided. And inflation is now running below the Fed’s target. (See chart below).
In Krugman’s view, we need more inflation, not less. For several reasons:
- Inflation erodes the real burden of debt, which we’re still overloaded with (This is because debt incurred in old dollars can be repaid with dollars that are worth less)
- Inflation encourages people to spend money instead of hoarding it (because the money will be worth less tomorrow)
- The unemployment rate is still too high, so the Fed is falling short of one objective of its “dual mandate” (to keep inflation moderate and the unemployment rate high).
Whether you agree with Krugman or the Fed’s dual mandate or not, inflation is one of the ways that the U.S. will finally get out of the pickle it has gotten itself in.
Photo: St. Louis Fed
Inflation, after all, was one of the key ways the country worked off the huge debt load it built up during the Depression and World War 2.
The Fed will quietly run inflation as hot as it can without the Chairman getting fired. And although this will screw savers and retirees who live on fixed incomes, it will be better for the rest of the country.
And so it will be justified as being for the greater good (which, sadly, it probably is).
SEE ALSO: KRUGMAN: It’s Amazing How Idiot Inflation-Mongers Refuse To Admit They’re Wrong