Inflation: Why Not?

In a New York Times Op Ed, Paul Krugman argues that the Fed is worrying too much about inflation and not enough about unemployment and should therefore goose the US economy with more artificial stimulation. Here is a quote from the article: “At this point, inflation is once again running a bit below the Fed’s self-declared target of 2 percent.” Based on that, Krugman wonders, and then concludes, “…would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.”

The thing that puzzles me is that inflation is already at 3%, averaging 3.2% for 2011 and 2.9% for the first two months of this year. Mr. Krugman must be using a different set of numbers or a different method of calculation, but the numbers I am quoting are based on the Bureau of Labor Statistics Consumer Price Index. You can see them here.

Mr. Krugman is ideologically consistent of course in favoring inflation as a way out of our current crisis because it is an excellent way to transfer wealth from people who are lenders, the wealthier, to those who are borrowers, the less wealthy. In his column, Krugman acknowledges this misguided goal and questionable benefit openly.

I know how that works. In the 1960’s, 70’s, and 80’s I enjoyed and benefited from inflation as it shrunk my mortgage relative to my income since I was fortunate in usually getting raises greater than the inflation rate. However, when inflation exceeded 13% during the Carter administration, the economy was in serious jeopardy, business was difficult because nobody would establish contract prices, and 30 year mortgages were being offered at around 16%.

I’m inclined to agree with Mr. Krugman that inflation of 3% to 4% is not a terrible thing, but, if we take his advice and further goose the economy, even though the inflation rate is already 50% higher than he says, I’m thinking we will be in serious danger of once again experiencing double digit inflation rates. And what I am really thinking is that we are going to get there anyway even without further stimulus. And if we do, we will see true economic misery.

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