Since 1970, inflation has always been positive. There have been times when inflation was a major economic problem as shown in 1918, 1947. Deflation has been a concern too especially during the Great Depression. In the 1990s, prices have seemed to stabilize. Does that mean that inflation isn't a problem?
I think the FED can control price changes with monetary policy. Price stability has been the result of artful policy by the FED. I am worried that the government spending by the Obama administration will fuel the flames of inflation.
Government spending can be a source of inflation. However, a central bank committed to containing inflation doesn't have to monetize the spending, thereby cutting it short. Unfortunately, to do that, the central bank has to raise interest rates which will slow the economy.
ReplyDeleteThe big question is does the government have the political will to let the central bank do its job, and at the same time will the government have the polital will to bring its spending under control? Stay tuned.