Do We Need A Little Inflation To Get The Economy Moving?

Inflation is good, at the right time, and in moderate amounts. Like adding just a smidge during a recession when there’s a lot of people in debt. Knowing that prices will rise, some consumers and businesses are prodded to crack open their pocketbooks. The value of debts drop, easing the burden on strapped borrowers. Having used up a lot of options already, the Fed could slightly raise its inflation target and let prices slowly rise over the next few years, but they’re unlikely to announce anything remotely close to that in their meeting this week. Namely because people really really really hate inflation. Why is that?

Well, in his 1966 study, “Why Do People Dislike Inflation?” Yale economist Robert Shiller posed the same question. His survey found:

* people think higher prices reduce the standard of living and make them “poorer”
* people see it as “weakening” a country’s economy
* people connect inflation to being undisciplined, and not able to stay within budget

Clearly, there’s a moral and emotional aspect to people’s aversion to inflation, despite how it helps out those who are in debt and dragging down the rest of the economy. But wait, isn’t that rewarding people for bad behavior? Why should the savers suffer while the spendthrifts catch a break?

In The New Yorker, James Surowiecki writes, “…the economy doesn’t exist, in the end, to reward virtue and punish vice. It exists to maximize our well-being, and, currently, doing that may require helping the undeserving and irresponsible, if only because there are so many of them. Boosting inflation isn’t the right policy, but it may be the correct one.”

In Praise Of Inflation [The New Yorker]
Why Do People Dislike Inflation (Robert Shiller) [Google Books]