Friday, November 19, 2010

More Confusion On Inflation

Kelly Evans writes a typically-interesting daily column, Ahead of the Tape, in the Wall Street Journal's Money & Investing section.

Wednesday's piece focused on inflation, with the declarative title Why an Inflationary Outbreak Isn't Likely.

Arguing from  Keynesian demand-based, capacity-oriented bases, Evans wrote,

"U.S. consumers, in other words, are hardly better-equipped today to handle higher prices. That is no small matter. It limits the risk of an inflationary outbreak. If consumers don't have rising incomes or savings to pay for higher food and energy costs, for example, they will have to adjust by pulling back on spending elsewhere. That is a deflationary, not an inflationary, outcome."

That's true, from a purely Keynesian perspective. Evans went on to cite comparisons to the 1970s and quote an economist for further proof of slack labor demand.

The problem is, this approach ignores the Austrian school's definition and conception of inflation as a monetary phenomenon. Milton Friedman, of course, agreed, with his now famous quote,

"Inflation is always and everywhere a monetary phenomenon."

Isn't that why we had stagflation in the 1970s, and may be creating it again now, as I argued in this recent post? Back then, one commodity, oil, drove the US inflation rate up into the teens. Arthur Okun's misery index skyrocketed, as interest rates soared to cover inflation expectations. Yet, curiously, Evan's doesn't touch on those aspects of the late 1970s US stagflation experience.

The reason stagflation can occur is because slow economic growth can be divorced from inflation caused by commodity prices and foreign trade flows which can depreciate the dollar.

Only by focusing on Keynesian production-factor supply and demand as the source of inflation can you ignore the monetary sources of the phenomenon.

I'm frankly a bit surprised that the Journal is printing this sort of nonsense.

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