By Richard Ebeling
On October 27th, The “New York Times” featured an article on, “In Fed and Out, Many Think Inflation Helps.” It quoted Costco’s chief financial officer as saying, “I’ve always said that a little inflation is good.”
Charles Evans, president of the Chicago Federal Reserve Bank, said in a recent speech that, “inflation below our target of two percent [per year] is costly” to the economy.
The “Times” article also referred to an article from a few months ago by Harvard University economist, Kenneth S. Rogoff, in which he stated, “A sustained burst of moderate inflation is not something to worry about. It should be embraced.”
How, exactly, does the inflationary “magic” work? Basically, by depreciating the value of the money in everyone’s pocket and declaring that we are all better off as a result.
Putting a lot of more money in people’s hands usually results in their attempting to spend it on the various goods and services they would like to have that money can buy. The greater spending tends to push up prices and increase sales.
The “magic” comes in due to the fact that workers’ wage contracts and resource price agreements tend to change more slowly, so they tend to lag behind the initial price rise of the finished consumer goods those workers and those resource suppliers help to produce. The rise in selling prices while labor and resource prices remain the same generates the extra profit margins that “stimulate” employers to try to expand output and hire more workers.
But the quick fix of inflation in creating “good times” and more jobs is short lived, and is an illusion like many other “fixes” that provide an initial “high” but soon fade away.
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