Nobel Prize winner Paul Krugman, argues in his latest New York Times column that the recent inflationary concerns expressed by many in the field are unfounded, and are more about politics rather than economics. Prof. Krugman also points out that the recent pressures have been more to the deflationary side.
From The NYT: Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner….But does the big inflation scare make any sense?[I]n ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.
First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.
Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector…
But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.
If inflation isn’t a real risk, why all the claims that it is?…[E]conomists sometimes disagree. And big disagreements are especially likely in weird times like the present, when many of the normal rules no longer apply.
But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy.
Yes, we have a long-run budget problem…But when it comes to inflation, the only thing we have to fear is inflation fear itself.
Looking at the current fragile state of our economy, it’s doubtful inflation will raise until employment and capacity utilization tighten. As far as the deflation subject is concerned – we think Krugman raises an objective argument. The fact is, and as is evidenced by most recent surveys, firms receiving lower prices for their products keep outnumbering those receiving higher prices.