Why inflation is a central banker’s goal
It used to be that if you really wanted to scare economists and the public, you need only mention one terrifying word: inflation. But really, inflation is a lot like candy. A little bit here and there makes your life so much better, and — as millions of kids are bound to find out this weekend — too much leads to ruin.
One of the goals of Quantitative Easings I through III was to stimulate inflation up to a point; 2 percent was the Federal Reserve’s stated goal. And even though inflation never quite reached that target, QE is ending.
Now Japan is picking up the torch. For decades, the once booming economic powerhouse has been suffering from stagnation, or to put it another way, a lack of inflation.
“Japan wants inflation,” says economist Justin Wolfers. “Last night they announced that they were going to buy even more bonds because they aren’t getting as much inflation as they wanted.”
So why do Japan, the U.S. and Europe want to stimulate inflation? Because inflation, in the right amount, is a sign of economic growth. In a healthy economy, wages increase steadily. In turn, businesses raise prices and that leads to inflation.
At the moment, wages in the U.S. and Japan are down when adjusted for inflation and lots of people are still looking for work. “Those of us that have jobs probably don’t feel comfortable asking for a raise, and all those people looking for work are willing to accept work at fairly low wages,” says Wolfers. “So all of that puts downward pressure on wages.”
Typically the first thing a government can do to boost the economy, cut unemployment and raise inflation is lower interest rates. But, says economist Josh Bivens, “the short term interest rates that the Fed controls directly, have been stuck at zero since about 2008 and interest rates can’t go below zero.”
Which is why the Federal Reserve and now Japan have turned to the more unconventional tool, buying trillions of dollars in bonds.
But these tools don’t get used in a political vacuum. People disagree about how much stimulus to inject into the economy. That makes finding the right amount of stimulus harder than getting a kid to sit still after eating a bag of candy.
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