The Federal Reserve will meet later this month, in part to determine whether the economy is finally strong enough to raise interest rates. Part of the data they’re looking at came out Thursday — consumer prices. That’s what we pay for “a representative basket of goods and services,” according to the Bureau of Labor Statistics. For the past 12 months, those prices have been pretty flat. In other words, we’re not seeing much inflation out there. Laura Veldkamp, associate professor of economics at NYU Stern School of Business, explained why a little bit of inflation is a good thing.
On why a positive inflation rate is actually good for the economy:
Because the alternative is worse. We don’t like to see prices changing. We don’t like prices at the store changing. We certainly don’t like prices on our wages changing, but the alternative is that quantities change. The economy is like this system that absorbs shocks, and either prices move when a shock hits the economy or quantities move when a shock hits the economy. What are these quantities I’m talking about? These are like the numbers of firms or the numbers of workers. So if we don’t make little adjustments in prices that help the economy adjust to these shocks, instead what we’ll see is firms going bankrupt and people losing their jobs.
On what happens if wages don’t go up with inflation:
That means that people’s wages won’t be able to keep up with the costs of the bundles of goods that they’re consuming, so they’re going to start to feel poor. On the other hand, that’s going to make workers cheaper to firms, because workers will seem less expensive to them than, say, buying new machinery. Hiring someone to check out your goods will look relatively cheap rather than buying a machine that will do the checkout for you, so that could lead to a surge in employment. If you’re out of a job, you should be happy if the wages stay pretty low, because that makes it more likely that someone’s going to want to hire you. If you already have a job, and you’re likely to keep it, then this is bad news for you, because it means you’re going to have less ability to purchase the goods and services you were buying before.
On the broader economic picture in the U.S.:
I think there’s a lot of uncertainty right now. I think we could see — with good management and fiscal prudence, and a little help from our friends and neighbors around the world and good policy on their part — we could see a resurgence of growth. The U.S. economy is below the trend level of output that it should have been pre-financial crisis. We’ve got some slack in the system, and we could mobilize more people back into the labor force and rejuvenate investment and really have a surge of economic activity in the future. But that’s a lot of ifs. Things need to go well, and I think a lot of people are still hesitant to reinvest and to start new businesses, because it does seem like kind of a risky time.
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