Economists, Business Leaders: Learn to Love Inflation

Monday, 28 Oct 2013 02:40 PM

By Michael Kling

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Some economists have been arguing that we should stoke higher inflation.

Even some business leaders are wishing for a bit more inflation, according to The New York Times.

Costco Chief Financial Officer Richard A. Galanti told analysts that low inflation was partly to blame for the store's slowest revenue growth since the recession.

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"I’ve always said that a little inflation is good," he said back in December 2008.

Wal-Mart, Rent-A-Center and Spartan Stores, a Michigan grocery chain, would also welcome more inflation. Inflation helps boost company profits by raising prices and helps consumers by easing their debt burden. It promotes more borrowing and spending.

Some economists have argued that inflation helps workers find jobs, the Times notes, because companies are more willing to hire new workers if they can raise prices. The problem: inflation is near a record low, an annual rate of 1.2 percent in August.

"Let me just remind everyone that inflation falling below our target of 2 percent is costly," stated Charles L. Evans, the president of the Federal Reserve Bank of Chicago, in a recent speech. "If inflation is lower than expected, then debt financing is more burdensome than borrowers expected. Problems of debt overhang become that much worse for the economy."

While most economists support a moderate inflation rate of about 2 percent, some are urging the Fed to be much more aggressive.

More traditional economists don't agree. Inflation could get out of control as the economy strengthens and unemployment falls.

Those opposing a move to stoke inflation remember the 1970s, a time of both high inflation and low growth, a dilemma dubbed stagflation.

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Others see Japan's more recent "lost decade" as a warning that low inflation can degenerate into deflation, falling wages and prices, with devastating economic impact.
Considering the threat of deflation, the Fed should continue its quantitative easing stimulus for now, argues Harvard economist Kenneth S. Rogoff, in an article for Project Syndicate.

"We are nowhere near the point at which policymakers should be getting cold feet about inflation risks," Rogoff writes."They should be spiking the punch bowl more, not taking it away."

Related Stories:


Official Inflation Rate Understates New Car Inflation By 300


MarketWatch's Kellner: Core Inflation Is 'Rotten'



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