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Sunday, June 22, 2008

Inflation or Unemployment?

Should the Fed be more concerned with inflation, or with weak output growth and rising unemployment? Robert Kuttner says the answer is easy, worry about output growth and employment:

My dissent on the risk of inflation, by Robert Kuttner, Commentary, Boston Globe: The Federal Reserve and the European Central Bank are both signaling a tighter money policy. The reason? Inflation...

The consensus is that combating inflation is more important than other economic goals, such as rescuing the financial system or preventing recession. Please permit me a dissent.

Unemployment went up a full half point to 5.5 percent in May, the biggest monthly jump in 22 years, and worse is forecast. Subprime fallout continues. Home foreclosures are running at 25,000 a month, and housing values are still dropping. If the economy is not quite in official recession, tight money will push it over the edge.

Consider the sources of today's inflation. The standard explanation is that inflation results when the economy overheats. Tight money helps cool it down. But today's American economy is too weak, not too strong. ...

Why the price increases? One theory is that China and India are consuming more energy and food, bidding up world prices. Another view is that Wall Street speculators ... are ... causing prices to spike.

But either way, it's not clear how higher interest rates in the United States will moderate worldwide prices of oil and food. ...

Rather, the nation needs ... to end its reliance on imported oil. It needs sensible food policies worldwide, so that the productive capacities of underperforming agricultural regions are realized. And it needs policies to restrict the purely speculative influences on commodities prices. ...

I think caution in pulling the trigger to fight inflation is in order, this doesn't look like a repeat of the wage-price inflation spiral of the 1970s, but Nouriel Roubini doesn't think it's as clear what the Fed and other central banks should do:

...central banks in many advanced and emerging economies are facing a nightmare scenario, in which they simultaneously must tighten monetary policy (to fight inflation) and ease it (to reduce the downside risks to growth)... [...full article...]

    Posted by on Sunday, June 22, 2008 at 03:06 AM in Economics, Inflation, Monetary Policy, Unemployment | Permalink  TrackBack (0)  Comments (77)

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