More Inflation Please

Washington Post journalist extraordinaire Neil Irwin is on a roll.

Dean Baker is shocked and awed by the high quotient of truth content in Irwin's Post piece titled "How a touch of inflation could boost the economy." (Baker usual spends his blog time correcting the various, erroneous memes the Post is spreading about the economy. Inevitably it is on the wrong side of the debate.)

Consumer prices rose 1.2 percent over the 12 months that ended in August, the Labor Department said Friday, and only 0.9 percent when volatile prices for food and energy are excluded. That is well below the range of 1.5 to 2 percent sought by the Federal Reserve.

The low inflation numbers reflect the reluctance of businesses to raise prices amid weak demand for their products and the inability of most workers to get raises at a time of high unemployment.

Somewhat higher inflation could strengthen the ailing economy. Inflation would make the heavy debt that Americans carry a bit more manageable as wages rise but the amount owed stays the same. And it would create more incentive for businesses to invest their cash rather than sit on it, because inflation would reduce the value of hoarded money.

Some economists fear outright deflation, a destructive, self-reinforcing cycle of falling prices that can cause a long period of economic misery.

Baker adds "Of course the article did not go so far as to mention the idea of the Fed deliberately targeting a higher inflation rate in the range of 3-4 percent. This policy has been advocated by such well-known radicals as Greg Mankiw, President Bush's former top economic advisor, Olivier Blanchard, the chief economist at the IMF, and Federal Reserve Board Chairman Ben Bernanke." Krugman, DeLong, Yglesias and others have advocated this also.

The IMF seems to be getting better in its analysis, as pointed out here by Krugman. He notes the OECD has also done an about face.