The Federal Reserve is considering bringing back inflation, on purpose:
The Federal Reserve spent the past three decades getting inflation low and keeping it there. But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed’s informal target.
The rationale is that getting inflation up even temporarily would push “real” interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more.
Idiots. We have established that this trick does not work. More precisely, it works only to the extent that you can trick people into thinking inflation will be low, otherwise people will simply compensate for the higher price level. More pithily, inflation does not stimulate the economy; only surprise inflation stimulates the economy.
The problem is that people quickly learn to expect inflation and the trick stops working. (And the fact that the Fed is being open about its plans doesn’t help!) Furthermore, once people start expecting inflation, they won’t believe you when you say you’re stopping. It’s very hard to put that genie back in the bottle again.
(Via Instapundit.)
POSTSCRIPT: Of course, if the Fed wants to bring back inflation, it’s making a good start.
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