December 7, 2010


Bernanke 1, inflation hawks 0: Like it or not, history shows Ben Bernanke is right to say inflation isn't knocking at the door. (Colin Barr, December 6, 2010, Fortune)

Economists at Goldman Sachs last week noted that since 1950, inflation has never risen during any two-year period that started with unemployment above 8%.

It is, admittedly, a small sample, with only three periods registering above 8% on the jobless scale since World War II: 1975, 1981-1984 and 2009-10. But in each case inflation fell during the subsequent two years by between 1 and 2 percentage points (see chart, right) -- even during the 1970s, now recalled unfondly as a bubbling cauldron of inflation.

The current cycle fits quite well in the falling-inflation framework. Inflation has fallen basically straight down since the so-called super spike of 2008, which saw the price of oil surge briefly to $147 in the summer before the financial system collapsed in the fall.

It was in response to this trend, as much as anything else, that Fed officials this fall started talking about the need to maintain price stability – in this case, by trying to boost inflation.

Bernanke and other Fed officials have stressed that they will revisit their quantitative easing plans whenever new data arrive, giving rise to talk that the central bank may cut short its QE plans next spring. With the economy showing signs of life and the Bernanke backlash surprising many observers, even some who see a strong case for additional QE have been trimming their expectations for the size of the Fed's purchases.

But let's face it, that's mostly wishful thinking. For all the modest gains in manufacturing output and the heartier-than-expected appetites of consumers -- and for all the understandable fear that there will be an inflationary period years down the road -- there is no sign the jobs bust will abate in the foreseeable future.

The unemployment rate was last below 8% in January 2009, at 7.7%, and economists don't expect it to drop below 8% again till 2013, according to the latest survey of 43 forecasters conducted by the Federal Reserve Bank of Philadelphia.

That explains why the Fed continues to fret over deflation, a spiral of falling wages and prices that makes heavy debt loads more burdensome by raising real interest rates. thoise on the Right rooting for hyperinflation just so they canm say Bernanke was wrong.

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Posted by Orrin Judd at December 7, 2010 5:09 PM
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