Inflation shouldn’t be Worried

Source:

The stuff we really need is getting more expensive. Other stuff is getting cheaper.

Why slightly higher inflation might benefit the U.S. economy

Overcoming Our Inordinate Fear of Inflation

 

Fixing America’s Roads Is a Great Opportunity

 

1. The conception of inflation itself may deserve a revision.

(Although eating and housing are still the most important parts for common life, so does smart phone in 21th)

price_changes

A.

  1. Most of the things falling in price are manufactured goods, due to technological improvements and productivity gains for decades.
  2. International trade is another reason. Many manufactured goods come from overseas, where labor costs are cheaper. So does global competition.

B.

  1. things like education and medical care can’t be produced in a factory, insulted from global competition
  2. Private and public insurance companies pay most medical costs, so there tends to be little incentive for individuals to shop around for cheaper medical care. So does student loan

 

2. How about a higher inflation target

fredgraphThe U.S. Federal Reserve Board hasn’t hit its stated inflation target of 2% in more than four years

a higher inflation rate of, say, 4 percent would

  • allow inflation-adjusted interest rates to go even further below zero to help boost economic growth during a possible future downturn.

But:

  1. price dispersion happens
    “when companies want to change their prices but for some reason can’t, inflation distorts prices from what they should be, which decreases economic efficiency.
  2. price hikes happen more frequently when inflation is higher, which gives more credence to “menu-cost” models of price setting

 (but studies find during the late 1970s and early 1980s, an era of high inflation, the absolute price changes don’t vary that much regardless of the inflation rate.)

 

3. We shouldn’t care inflation!

  1. Inflation time was also a time of slow growth, deep recessions and terrible asset returns.
  2. Harms like shoe-leather costs and menu costs don’t matter that much in a digital age.
    (economists shows inflation has almost no perceptible impact on productivity — and hence, on human well-being.)
  3. The costs of 10 percentage points inflation is only about as harmful as a 1 percent reduction in gross domestic product, investigated by professor Robert Lucas
  4. Real problems is that when prices rise fast, they also tend to bemore volatile — high inflation equals uncertain inflation [1]
  5. Although the historical correlation between inflation and inflation uncertainty is well-documented, that doesn’t mean the one causes the other.

a higher inflation target can get more people back into the ranks of the employed and shouldn’t be worried as long as it’s stable [2]

 

4. Government spending on Infrastructure

スクリーンショット 2016-08-19 1.18.02There is considerable unused labor remaining in the economy, especially prime-aged men who would benefit the most from an infrastructure push.

Government spending to roads and bridges benefits

  • If private-company interest rates rise, it means that capital is becoming more scarce for businesses because the government is crowding them out. If that looks like it’s starting to happen, we can always hit the brakes.

 

 

[1]

If inflation is predictable, lenders and borrowers can build it into their financing deals; nominal interest rates simply rise to take into account the shrinking value of money.Workers can ask for cost-of-living increases in their paychecks, effectively indexing wages to inflation. And businesses can build inflation into their investment plans.

[2]

The Fed’s so-called dual mandate, as laid out by Congress, is “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

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