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Home Publications Blogs Beat the Press The Post Wants YOU to Lose Your Job to Ease Its Concern About Inflation

The Post Wants YOU to Lose Your Job to Ease Its Concern About Inflation

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Friday, 25 February 2011 08:04

It seems as though the Washington Post's editorial board is losing sleep over inflation. Its lead editorial notes the recent rise in commodity prices and then warns that:

"Core inflation does indeed remain well within the Fed's safety range, but it has nevertheless begun trending upward, and one leading forecaster, Deutsche Bank Economic Research, says it could hit 2.1 percent, the upper limit of the Fed's usual target range, by the end of 2011. That could force the Fed to raise interest rates, slowing growth before unemployment has returned to pre-recession levels, in order to preserve its inflation-fighting credibility."

Actually, 2.1 percent inflation is not "the upper limit of the Fed's usual target range." The Fed never explicitly set a target range and there are a range of views among the Fed's open market committee (the body that sets interest rates) as to how high inflation can go before it poses any problem to the economy. For example, back in 1999 Chairman Ben Bernanke argued that in comparable circumstances Japan's central bank should deliberately target a higher rate of inflation in the range of 3-4 percent to lower real interest rates.

As a practical matter, the inflation rate has rarely been below 2.1 percent. As can be seen, there was only one year in the decades of both the 80s and the 90s when the inflation rate was below the level that the Post wants the Fed to have as the top end of its target range.

annual_inflation_5504_image001
Source: Bureau of Labor Statistics.

 

There is no obvious reason that the Fed should feel "forced" to raise interest rates if the core inflation rate happens to edge above 2.0 percent to preserve its credibility. Such an increase in interest rates would mean throwing more people out of work.

There are already tens of millions of people who have lost their jobs and/or their homes because of the Fed's mismanagement of the economy. There is no reason that the Fed should deliberately put more people out of work just because the Post editors and their friends have irrational fears about inflation.

Comments (5)Add Comment
...
written by liberal, February 25, 2011 8:48
Is it really clear that raising rates would stall the economy? Or would it just flatten the yield curve and hurt the banksters?
...
written by foosion, February 25, 2011 10:24
Yes, it is really clear that rising rates slow the economy. Note that rates can rise across the yield curve, so that it maintains its shape, just at a higher level.
World Commodity Prices.
written by Ralph Musgrave, February 25, 2011 12:22
.

Also, to the extent that inflation is caused by the rise in World commodity prices (and that’s a significant extent), it is pointless countering this contributor to inflation with rate rises, because there won’t be any effect. That is, world commodity prices will not fall, other than by a miniscule amount, just because the U.S. raises its interest rates.
...
written by izzatzo, February 25, 2011 12:37
Any economist understands how the Fallacy of Composition affects job losses and inflation.

If one person loses a job, then inflation doesn't go down, but if everyone loses a job and inflation goes down, that proves if there's too many willing to work but can't find work, the inflation that went down will go up again.

If enough unemployed find work to achieve full employment, Obama plans to bring back Paul Volcker and crush the hyperinflation into submission with a targeted 12% unemployment rate, right after he's re-elected.
Isn't deflationary spiral the most likely path to hyperinflation?
written by Charles Peterson, February 25, 2011 11:54
Isn't it actually the relentless cutting of government spending that could cause hyperinflation rather than the reverse? If we continue with a deflationary spiral, investment declines and more and more productive assets (including human resources) become degraded. But there is still plenty of money out there, at least in the investment banker's accounts. So when production goes to zero, but money doesn't, you have hyperinflation.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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