During the last 4 months of 2010 and early 2011 I got a lot of grief from the inflation hawks. Yes, QE2 seems to have lowered unemployment from 9.8% to 8.8% in 4 months, but they were having to pay more at the pump (I assume these commenters had jobs.) They warned that it was devaluing the dollar, leading to high inflation.
Unfortunately, in today’s world oil market with Chinese demand pushing production to near capacity, any recovery in the US (even an expected recovery) will push oil prices significantly higher. And of course Libya was an additional bit of bad luck. Payback for the good karma of the 1990s.
But this isn’t “inflation” in the 1970s sense. Back then wages rose rapidly and every time you went out to buy a new car it cost almost twice the previous one. This is an increase in the relative price of an important commodity, which strongly affects the headline CPI for a few months. Even worse, our insane ethanol policies cause it to bleed over a bit into food prices.
Well now the inflation hawks have gotten their way. Oil fell into the high 70s today. The Fed did something completely trivial on Wednesday, and basically washed its hands of the responsibility to keep NGDP at an adequate level. Both inflation and employment are now forecast to be far below the Fed’s implicit target over the next 5 years, and they don’t seem willing to do anything about it. BTW, according to the Cleveland Fed the TIPS spreads I often point to actually slightly overstate expected inflation; they have a more complicated formula that I don’t understand very well. It shows 10 year inflation expectations below 1.4%. Five year expectations are even lower.
So that’s our choice. Do we want to keep gas nice and cheap for those who have jobs, or do we want an economic recovery for the millions whose lives are being ruined by this recession.
And I’m not sure that even those with jobs benefit from these policies. Every time I save a few pennies at the gas pump I lose many thousands of dollars off my retirement fund. Economics is not a zero sum game. When millions are producing no output, almost everyone will suffer.
HT: Thanks to Lars Christensen for the Cleveland Fed data.
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