That's right folks, the Post has its second front page article in less than a week touting the end of the downturn. This one, which encourages readers to worry about the prospect of inflation gets just about everything wrong. First, it is important to realize that the economy is continuing to contract rapidly, even if the pace of decline may have slowed from the 6 percent annual rate in the first quarter. The economy has lost an average of more than 600,000 jobs a month. The Labor Department will almost certainly report another loss of more 600,000 when the May data is reported a week from next Friday. While the article reports that "unemployment is expected to top 9 percent and stay above 7 percent for the next two years," economists who were not surprised by the recession expect the unemployment rate to top 10 percent and remain above 7 percent for 3 years. More importantly, the article completely misrepresents the problem of inflation and wrongly attributes its inaccurate view to Federal Reserve Board chairman Ben Bernanke. The article describes Bernanke's view on inflation: "By problem [inflation], he means rising prices that destroy the value of money -- an experience fresh in the public memory. During last summer's run-up in gas prices, real disposable income fell at an annualized rate of 8.5 percent from July to September, Commerce Department data show. " Actually, the run-up in gas prices and the resulting loss in purchasing power had nothing to do with low interest rates and the Fed printing it too much money. It was attributable to excess world demand for oil driving up oil prices relative to other prices. Purchasing power of people in the United States would have fallen even if there had been zero inflation given the excess demand for oil, it just would have been brought about by falling wage income rather than rising oil prices. Inflation does not reduce purchasing power. Pure inflation simply means that prices and wages are rising together. By itself, it does not reduce purchasing power in aggregate. (Where would the money go?) There is redistribution associated with inflation. For example, homeowners benefit as the value of their homes rise relative to their mortgage debt. As a general rule, debtors benefit from inflation. Bondholders (the folks that got the bailouts supported so strongly by the Post) and other creditors are hurt by inflation. It is also worth noting that a decline in the value of the dollar, which is necessary for bringing the trade deficit closer to balance, will lead to an increase in the rate of inflation as imports become more expensive. The Post, which routinely runs articles, editorials, and op-eds warning about the budget deficit almost never runs pieces discussing the trade deficit, which until recently had been much larger.
--Dean Baker