With U.S. core inflation rising past the Federal Reserve’s 2 percent target last week, last year’s great inflation debate was reignited. Of the several fronts along which it has raged – Is inflation a real worry? Is it necessarily bad? Will there be a new era of inflation? Have government stimuli caused it? – the debate is most fiercely, and also misleadingly, waged on the Federal Reserve front.
Last August, the U.S. central bank announced it would continue low-interest rates and asset purchases under Quantitative Easing (Q.E.) even if inflation overshot the 2 percent target. Inflation hawks like Larry Summers fear a 1970s scenario when the Federal Reserve could not contain inflation, whether through inattention or incomprehension.
Only with the 1979 “Volcker Shock” jacking up interest rates to eye-watering levels – the Federal Funds Rate hit 18 percent at one point – did it decrease. Inflation doves by contrast, support the new Federal Reserve policy. The Volcker Shock is not to be repeated: It led to the deep early 1980s recession that inaugurated the deindustrialization of the U.S.
This debate is undoubtedly about class. While no one benefits from very high or hyperinflation, mild inflation typically accompanies robust economic activity and increased employment. Inflation-intolerant policies, while ensuring that wealth does not lose its value, tend to raise unemployment, penalizing working people. The problem with the debate is that it is not about Federal Reserve policy. That is determined not so much by levels of inflation or unemployment as the financial sector needs.
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