A Few More Notes on Inflation

    There is no doubt there is a widespread feeling that inflation is an evil in itself. This is part of why Scot Sumner recommends changing the Fed mandate from an inflation target to a Nominal Growth Domestic Product target (NGDP). 

     It ultimately depends on how you choose to look at it. As Investopedia puts it, "

Almost everyone thinks inflation is evil, but it isn't necessarily so. Inflation affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated. If the inflation rate corresponds to what the majority of people are expecting (anticipated inflation), then we can compensate and the cost isn't high. For example, banks can vary their interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up. "

 

    Inflation is not a zero sum game. In an economy with rising inflation I may lose as a consumer, yet gain as a worker, or debtor. This latter in particular is always glossed over by those who demonize inflation. In the 70s student loans weren't the albatross they are today because of inflation.  Then again, inflation normally is only present in growing economies with rising GDP. Deflation, on the other hand, characterized by a negative inflation rate only shows up during a bad recession or depression. Overall the effects of inflation are mixed and varied as Investopedia shows:

 

    "

Problems arise when there is unanticipated inflation:

• Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For those who borrow, this is similar to getting an interest-free loan.
• Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.
• People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.
• The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and more have to be updated.
• If the inflation rate is greater than that of other countries, domestic products become less competitive

      "

   "People like to complain about prices going up, but they often ignore the fact that wages should be rising as well. The question shouldn't be whether inflation is rising, but whether it's rising at a quicker pace than your wages. "

  "Finally, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) can be just as bad as high inflation. The lack of inflation may be an indication that the economy is weakening. As you can see, it's not so easy to label inflation as either good or bad - it depends on the overall economy as well as your personal situation.


Read more: http://www.investopedia.com/university/inflation/inflation1.asp#ixzz1bXbcbACG

    Deflation in truth is worse than inflation. The reason I feel this point is so vital right now is that we continue to struggle in a Lesser Depression and the illusion that inflation is any concern at present must be gotten over if we are ever to conquer "the politics of austerity" whether speaking of the need for fiscal or monetary stimulus.

 

   For a good history of the inlfation rate along with some other resources about the whole question of what inflation is and does please see http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx