Will inflation kill the economy?
Washington
INFLATION is back. What do we do about it? For starters: Don't ignore it.
The latest consumer price index (CPI) - the government's best-known inflation indicator - reported a 2.9 per cent increase from July 2017. The last time that the year-over-year gain was higher was in December 2011. Though hardly a cause for panic, it suggests intensifying price and wage pressures in an economy straining at its productive capacity. The Trump administration and its critics should be watching closely.
Consider this: rents rose 3.6 per cent from a year earlier; hospital prices increased 4.6 per cent, petrol 25 per cent and eating out 2.8 per cent. Still, some price increases were small or non-existent, offsetting some gains. New vehicle prices edged up a mere 0.2 per cent, electricity was down 0.8 per cent and airline fares dropped 4.1 per cent.
The reason for paying attention to inflation is that once it accelerates, it is hard to stop. That was what happened in the 1960s and 1970s. The quest to reduce unemployment led to easy money that spawned double-digit inflation. CPI inflation went from about one per cent in 1960 to 6 per cent in 1969, and to 13 per cent in 1979. It was crushed only in the early 1980s when the Federal Reserve raised interest rates sharply.
This searing episode taught many important lessons, but we are in danger of forgetting them because a majority of today's Americans did not experience the high inflation. (In 2017, the US population was 326 million; roughly two-thirds were not alive or were too young to understand the high inflation.) Here are four significant takeaways:
Since late 2015, the Fed has been gradually raising interest rates in hope of heading off future inflation increases. This focus is surely justified. But it is not clear whether the Fed's moves amount to too little too late, or too much too soon. The Fed's forecasting record is at best spotty. If we get this wrong, it could kill the economy. THE WASHINGTON POST WRITERS GROUP
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