Stagflation and boomflation
Inflation is a period during which price indices increase. But price indices can increase for all sorts of reasons; hence it makes absolutely no sense to study the impact of “inflation” on any other variable. That impact will always depend on what causes the inflation.
David Beckworth recently directed me to a speech by Lael Brainard:
While national data do not directly disaggregate the differential effects of inflation by household income groups, a variety of evidence suggests that lower-income households disproportionately feel the burden of high inflation. Lower-income families expend a greater share of their income on necessities; have smaller financial cushions; and may have less ability to switch to lower-priced alternatives. Arthur Burns noted in the late 1960s that “there can be little doubt that poor people…are the chief sufferers of inflation.”
Today, inflation is very high, particularly for food and gasoline. All Americans are confronting higher prices, but the burden is particularly great for households with more limited resources. That is why getting inflation down is our most important task, while sustaining a recovery that includes everyone. This is vital to sustaining the purchasing power of American families.
Brainard is right that we need to get inflation down, but the rest of the analysis makes little sense.
Here it might be helpful to distinguish between two broad types of inflation, stagflation and boomflation. Stagflation occurs when the short run aggregate supply curve shifts to the left. This reduces real output and real income, while boosting the price level. Boomflation occurs when aggregate demand shifts to the right, boosting real output and real income (in the short run), while increasing inflation. The late 1960s were an example of boomflation while 1974 was an example of stagflation. (Today we have some of each.)
In the late 1960s, Arthur Burns suggested, “there can be little doubt that poor people…are the chief sufferers of inflation.” Actually, boomflation raises real income in the short run, including the real income of the poor. Indeed the 1960s saw one of the largest reduction in poverty rates in all of US history. The inflation of the late 1960s was bad, and should have been prevented by tighter Fed policy. But it wasn’t bad because it hurt the poor (in the late 1960s); it was bad because it led to greatly increased economic instability during the 1970s.
In contrast, stagflation does hurt the living standards of the poor. But the reduction in living standards is caused by the “stagnation” part of stagflation, not the “inflation” part of stagflation. Given the existence of an adverse supply shock, a non-accommodative Fed policy that prevented any temporary increase in the overall inflation rate would hurt the poor by even more than did the stagflation. I would add that stagflation hurts both the poor and the rich, whereas boomflation helps both the poor and the rich in the short run, and hurts both the poor and the rich in the long run. Income inequality is not the issue here.
Whenever you encounter any study of “the impact of inflation”, run for the hills. It’s likely to be complete nonsense, an exercise in reasoning from a price change. It would be as silly as a study evaluating the impact of high oil prices, without first ascertaining whether the price increase was caused by more oil demand or less oil supply. In the former case, oil consumption will rise. In the latter case, oil consumption will fall. Or a study looking at the impact of higher interest rates, without first considering why interest rates had risen. Tight money? Higher inflation? A booming economy?
PS. Notice that I had to invent a word to do this post? (Boomflation.) Also notice that the economic profession has no word for “NGDP growth rates”. When a science lacks words for some of the most important concepts in their field, it’s a pretty good indication that the subject is hopelessly confused.
PPS. Shorter version of this post: NRFPC