Why is inflation so bad?

That is the theme of my latest Bloomberg column, here is part of the final bit:

I am left with two major worries. First, higher rates of inflation redistribute wealth in a disruptive manner. For better or worse, more and more Americans are employed in the relatively bureaucratic service sector, which includes education, health care and government. If price inflation spikes as high as 6%, most of those workers do not rapidly receive an offsetting wage hike to restore their previous standards of living.

They might get higher pay by getting a new job, or by credibly threatening to leave. But that’s often a tense and unsettling position, from both a personal and professional standpoint. People might even have received stimulus dollars earlier in the pandemic, either directly or indirectly, and thus broken even or come out ahead. Still, with inflation, they will experience a loss of purchasing power, and they will hate it.

The second major worry is that inflation tends to require a subsequent disinflation, if only because people hate inflation so much. And we macroeconomists know that disinflations (or outright deflations) tend to bring recessions. When the U.S. Federal Reserve tightens monetary policy by a significant amount, aggregate demand in the economy falls, leading to losses in output and employment.

Of course, that’s a funny way of explaining why higher rates of price inflation are bad: Essentially, inflation is bad because it has to end. A subtler version of this theory is that workers and voters have only a limited tolerance for disruptions — and when they occur, we end up making blunders in our efforts to get out of them.

The proper critique of inflation is thus quite general. A pandemic is also a disruption, and we’ve made many mistakes in our efforts to end that as well. One of those mistakes, in fact, has been excess inflation. It will not be our last mistake, as we are still building our ever-widening circle of errors.

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