Inflation or Paranoia

Josh Bivens has a good post at EPI on the so-called affordability crisis, making the obvious, but often forgotten, point that affordability is not about prices alone. It is about prices relative to incomes. That is, the price of gas, rent, or health insurance matters, but what matters even more is whether the income of workers has kept pace with the capacity of the economy to produce those things. In other words, the affordability crisis depends not just on the price level, but on the wages of workers, that have not kept up, over the long run, with prices.

This is also why the endless obsession with inflation as the root of all evil is so misleading. I have often noted, following the old Bruno and Easterly paper, that inflation below a relatively high threshold, around 40 percent annually, does not seem to have clear negative consequences for growth (see this post with a link to the paper). Their point was not that inflation is wonderful, or that prices do not matter, but that the conventional view that even moderate inflation is economically disastrous has very little empirical support. Excluding high-inflation crises, they found no consistent relationship between inflation and growth.

Incidentally, when I was at the Central Bank of Argentina and inflation was at around 25 percent per year (below Milei's average inflation, BTW), I often said that inflation was high, but no a problem, since wages were growing faster. In other words, the Very Serious People who treat 5 or 6 percent inflation as Weimar in the making are, as usual, confusing their ideological preferences with evidence.

The real issue with inflation is distributional. If prices rise, and wages follow, the consequences are very different from a situation in which prices rise and wages lag behind. In the latter case, inflation becomes a mechanism for reducing real wages and redistributing income upward. That was one of the central points of my old chapter on money and inflation, that the heterodox tradition, particularly the structuralist and conflict-inflation approaches, understood inflation as the result of unresolved distributional conflict, external constraints, bottlenecks, and institutional arrangements, not simply as too much money chasing too few goods.

The problem is not inflation in the abstract, but who has the power to protect their income when prices change. That is why Josh’s post is important. As he and his co-authors say: "US families’ feeling that life is less affordable than it should be is grounded in objective realities about how the economy has failed them." It's not simply a subjective perception. More or less what I suggested in this post. The affordability crisis is, in that sense, another name for the long wage squeeze.

Note that the paranoia about inflation will have consequences for policy making. Now that inflation increased a bit, as a result of the Iran War, and has remained a little bit above the target, the new Fed chair will a much harder time bringing interest rates down (that is if they do not increase instead). Wall Street anxiety's are more important than the realities of working class people.