Should we bring inflation back from the dead?

A man dressed as a zombie at a 'Zombie First Responder' class in Sandy, Ore. In February, we declared inflation dead after years of easy monetary policy and negligible consumer price increases. As the Federal Reserve concludes yet another meeting to keep inflation six feet under, we ask if it's time to bring inflation back from the dead.

In February, we aired an obituary on this broadcast. Inflation, we said, “died at the hands of a sluggish economy and a Federal Reserve intent on maintaining interest rates at zero.”

Fast forward to this afternoon, and it’s the same old, same old. The Federal Reserve wrapped up a two-day meeting on interest rates without as much as a “How do you do?” to the prospect of inflation. They’ve clearly moved on.

But on the premise that the unexamined life isn’t worth living, is it worth trying to bring inflation back from the dead?

This is tricky business. Inflation could lead to high gas prices and high food prices, but according to David Blanchflower, the Bruce V. Rauner Professor of Economics at Dartmouth College, it doesn’t have to.

“Really, at the moment, for the economy, a little bit of inflation is our friend, not our enemy,” he says.

Blanchflower isn’t talking about Zimbabwe-style hyperinflation. He’s referring to moderate inflation -- something, he says, that could help Americans whose homes are underwater, because inflation tends to drive up real estate prices.

According to Kevin Jacques, the Boynton D. Murch Chair in Finance at Baldwin Wallace University, some inflation could help those of us who have borrowed money for things like a car or college.

“When I go back to pay back my borrowings, I am actually paying them back with cheaper dollars,” he explains.

Jacques says moderate inflation could be good for business. Companies could raise prices, that could lead to higher salaries, “and assuming they can control their costs, that could be beneficial to their profit margins; that could be beneficial to them expanding their business, creating jobs; that could be beneficial to their shareholders.”

Of course, resurrecting inflation is not risk-free. Economist Marvin Goodfriend says this kind of thinking could lead the economy to overheat: “If a little inflation is good, maybe a little more inflation is better.” It is something that is hard to control.

Goodfriend tells his students at Carnegie Mellon University to remember something.

“Inflation doesn’t die,” he says. “It’s like a vampire.”

You can vanquish it with “determined policy,” Goodfriend explains. Inflation will creep back into its coffin. And then, when you least expect it, it can come back with a vengeance.

About the author

David Gura is a reporter for Marketplace, based in the Washington, D.C. bureau.
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A little bit of inflation isn't good just like a little bit of cancer isn't good. The degree to which it helps borrows is the same degree to which it hurts the saver on the other side. Why should the Fed be helping one and hurting the other? They're talking about the the 2% numbre which has historically been considered to be a worse case ceiling as if now it's a floor that they hope to acheive. As for the case people that over leveraged to buy assets and that are now underwater, the answer isn't to distort nominal prices to make those people whole, it's to let those bad investments liquidate at real prices. The main way that inflaiton helps unemployment is that it reduces real (inflaiton adjusted) wages of workers, thus making labor more affordable to employers. But a better way would be to simply let wages fall to the market price honestly.

You have to distinguish between real inflation (stuff the rank and file buys) and the economists' CPI. The CPI (which EXCLUDES food, housing, transportation, medical expenses and everything that a regular person has to buy) has not gone up. The stuff that Joe plumber buys is measured as inflation and that has gone up. We pay more everyday for food, housing, transportation and medical expenses. It costs even more when you are unemployed (at least it feels that way). So, you must separate the two... inflation is very much alive. The CPI is hibernating. Make sure you dress up the correct zombie!

This is the stupidest segment Marketplace has run in quite a while -- and that's saying something. Inflation does not work as described in this story. If you'd like to read what an actual Ph.D. economist has to say, here's the link to my blog entry: http://gonzoecon.com/2013/05/marketplace-megafail/

The entire Marketplace staff should be embarrassed by this.

I find that the prices of groceries, restaurant food, hardware, lumber, appliances, automobiles, bundled TV-phone-intnet and utilities (water & sewage) have increased quite a bit in the last four years. I don't know where the Feds get their data.

Any inflation is not good for me. I am retired with savings in zero-interest accounts. Inflation simply robs me of x% of my nest egg.

Borrowers would benefit from inflation, paying back in cheaper dollars. But why should they take my money to finance their lifestyle?

Inflation wouldn't help business. They would either end up paying more in salaries (remember, they're paying in cheaper dollars) or forcing their employees to accept a lowered standard of living. We've seen enough of that already.

Inflation (and deflation, for that matter) are to be avoided . That's one of the duties of government.

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