Inflation Coming, Don't Worry

According to Forbes, Bernanke is saying "It's Jobs, Not Inflation, Stupid." With one party in the U.S. concerned that the Fed's quantitative easing will go too far and result in inflation, Bernanke is clearly signaling that the problem is jobs, not inflation. Dummies.

This sounds like what we wrote a little over two weeks ago ('Twist'counting the Future). If the Fed is going to err, they will have more margin on the inflation side. Therefore, they will err, we will get inflation, and those holding U.S. currency will find that their buying power has been eroded.

Although inflation is not fun, we haven't really had any in a long time. Everyone who had direct experience with real inflation, last seen circa 1981, is now 30 years older. Average annual inflation has averaged just 2% for about 15 years now, as measured using the U.S. Government's standard definitions. People in their 20s and 30s have never lived through an inflationary period. Few of us have any recent painful memories to dissuade us from policies that might cause it. And if you were to take the position that we should use an alternative definition that results in a higher rate, then since we're already in that kind of inflation, why not set monetary policy so that all of the measures of inflation are posting serious numbers, and get some jobs started in time for the 2012 Presidential election? (Forbes columnist Kenneth Fisher should be all over this one, as historical equities market records show that monetary policy is typically goosed to create jobs and inflation just prior to elections in Presidential years.)

To illustrate how inflation hasn't been around for a long time, I went Googling for an image of inflation rates since 1970. It was a hard chart to find. Most inflation charts stop at 2000, or 1990, or show some irrelevant inflation measure in healthcare (different topic, must skip for now) or other noise. I finally found this one (scroll down to see it) which shows the peak around 1980 and subsequent "collapse" in inflation rates.

Overall, inflation is bad for lenders, good for debtors. If you have to make a normative judgment, then you might say that at the present time a little inflation would be good for U.S. consumers, who on average hold too much debt. Inflation works wonders on real assets that are highly leveraged, like, say, houses, as the value rises but the amount owed remains fixed. If we were to get 1970s inflation again, with 7 to 10 years of rapidly increasing prices, then everyone who owns a house now and holds onto it will be wealthy by 2020.