Don’t panic: a little inflation is not a bad thing


The author is a professor of economics and public policy at Harvard University and the former chief economist of the International Monetary Fund

Is a moderate burst of inflation after the pandemic necessarily a bad thing? As the United States has experienced rapid inflation (5.4% in the 12 months to June), people are increasingly talking about the end of inflation if the Fed is far behind the curve. There are real risks. But maybe after ten years of inflation being lower than the target, a few years higher than the target, such as 3%, may be a good thing.

US inflation today is more like good news than bad news. The rise in prices is mainly due to the fact that the US economy has performed much better than it seemed a year ago-thanks to early active vaccine procurement, continued huge macroeconomic support and the unexpectedly successful shift to remote work in the US.

The fact that there are various temporary bottlenecks is not shocking. Last year, the car rental company Hertz declared bankruptcy; this year, as people want to travel again, car rental prices have soared. After the quarantine was over, everyone suddenly hoped that the businessmen would enter their homes for repairs and improvements. Refrigerators and washing machines have very long waiting times, even though their prices have risen sharply. The job market is tight, and wage growth is strong, and it may be getting stronger.

If the economy is weaker and inflation is lower, will we feel better? As the economy digs out of the deepest pit since the Great Depression, continued inflation may be a risk. But unexpected setbacks in the fight against the pandemic are a greater risk.

In most parts of the United States, people have a clear sense that the epidemic is over. But this is a very narrow view. It is true that in the United States, almost everyone who wants to be fully vaccinated can do it; the vast majority of people who have not been vaccinated just choose not to vaccinate. (Don’t ask me why.) But the pandemic is far from over. Two-thirds of the world’s population live neither in developed economies nor in the predicament of China. They can only hope that their biggest concern is inflation-although in countries such as Argentina, inflation is also out of control.

In 2008, with the outbreak of the financial crisis, I debate Emphasize that the central bank should relax its 2% inflation target and temporarily set the inflation target at 4% to 6% within a few years.If they act quickly and adopt Effective Negative interest rate Policy, I believe it is possible. Higher inflation in the past few years will help stimulate demand and reduce the unsustainable debt burden of many countries. (The other best policy is to write down U.S. subprime mortgage debt and unconditionally transfer it from Northern Europe to pay Public debt write-down In peripheral countries, such as Greece and Portugal. )

Today, the situation is different. Because the US Treasury Department and the Federal Reserve intervened so quickly and proactively, in fact, the number of corporate bankruptcies in 2020 is less than in 2019. Given that the number of bankruptcies usually increases sharply during a recession, this certainly sounds a bit like too much good news.

But even if the debt problem is brought under control, temporarily higher inflation still has benefits. Most importantly, the Fed occasionally needs to allow inflation above its target—if it says its average target of 2% is serious. Many people are beginning to wonder whether this is possible. After the inflationary drought of the past decade, a mild downpour is welcome. Improving the credibility of the Fed’s target inflation should help adjust the term structure of interest rates and give the Fed more room to cut interest rates in the future.

In fact, economic theory hardly gives strong guidance on whether the 3% inflation rate in normal times is better than 2%, as long as it remains reasonably stable and predictable. When Olivier Blanchard was the chief economist of the International Monetary Fund in 2010, he believed that the inflation target should be raised to 4%.

For example, a sustained 3% inflation will also provide an opportunity to reconsider the Fed’s current 2% target.This is not a radical idea: some central banks such as Australia and Hungary already have higher interest rates Inflation target Other institutions such as the Bank of Canada have also considered this idea.Yes just like me long It is believed that a more elegant way to give the central bank more room to cut interest rates in a deep recession is to be unconstrained Negative interest rate policy, But I save it for another day.

For several years, I have been emphasizing the positive aspects of a moderate increase in inflation. But there are also risks. The biggest question is whether the unlimited expansion of government spending and transfer payments has not been substantially (not necessarily completely) offset by higher taxes. If global borrowing costs unexpectedly rise, the higher cost of repaying a larger debt burden may cause the government to pressure the central bank to lower nominal interest rates—which may cause inflation to eventually become severe.

Right now, the market seems to be totally unconcerned-considering the general uncertainty that exists when the global economy emerges from a pandemic, the market is almost totally unconcerned. Nonetheless, at least for the time being, moderately rising inflation is more likely to indicate that things are going well, rather than that we are doomed to fail. The Fed has no reason to suppress it too quickly.



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