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Should we bring inflation back from the dead?

David Gura May 1, 2013

Should we bring inflation back from the dead?

David Gura May 1, 2013

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.

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