Should We Fear A Reappearance Of Inflation?

 In today’s Washington Post Robert J. Samuelson has raised the possibility that the Federal Reserve may be setting the US up for a reappearance of inflation.  He invoked the 1960s and 1970s when supposedly the Fed allowed inflation to get out of control out of a supposedly misguided effort to bring down unemployment by allowing successive small increases in inflation. Supposedly the newly released report on changed Fed policies may be taking us back to those bad old days, even though for now RJS admits that inflation is low, with expectations of inflation only at 1.34%.  How worried should we be?

OK, I am not going to say that a resurgence of inflation is impossible.  I can imagine it possibly resurging, with such a development perhaps being associated with a sharp decline of the US dollar, perhaps associated with a turn from its use as a reserve currency.  I do not see that happening immediately, but there is theoretical literature that suggests that such an event could happen rather suddenly at some point.  If so, then maybe it could happen.  Is the new Fed policy likely to bring this on?

I suppose one reason to be concerned is that the supposedly new policy approach has been rather opaque.  I have had trouble getting a clear picture what the changes are in the policy. The main reports have been relatively undramatic, basically an idea that at least through the next year there will be no interest rate increases.  Probably a bigger deal is that the Fed might tolerate inflation higher than the 2% targeted rate.

But a curious thing is that a funny thing has happened about that target.  As long noted by Dean Baker and some others, that 2% is a target, meaning that supposedly that is what the rate should be on average.  If that is the case, then we should expect it to be higher than 2% as much as it is below that rate. But in practice, it seems that the “target” has become an upper limit, and Samuelson essentially refers to it this way.  This makes for the rather weird outcome that a reassertion of what has long been official policy but not followed in practice should again be the official policy is somehow a scary threat of a possible outbreak of future serious inflation.  This becomes a rather absurd analysis.

Addendum (9/1): I note one area where we have seen rising prices is for food, with many people worried about that, indeed, I have just heard a poll showing this being the top worry of Americans during the current pandemic.  As it is, this seems to be at least one supply-side driven element in inflation that is out there, probably not so important for a longer run inflation policy.

Barkley Rosser