The Corner

The one and only.

Inflation, Again


Over at the Federalist, Sean Davis criticizes what he takes to be my views, but he misstates them. So, for example, he claims that I “belittle” those who worry about rising prices and “derisively” refer to them as “cranks.” Follow his link to my post – or read the follow-up – and you’ll see that in fact I was characterizing as “cranks” those who buy the claims of Shadowstats that inflation is several times higher than official statistics indicate.

He believes I am “congratulating” the Fed for making food a lower share of family budgets than it used to be, when this is not happening. I was not congratulating it. My view is that the Fed has no power over what share of household spending goes to food, as it has little power over relative prices. “The assertion by Ponnuru that commodity inflation is only real if it simultaneously affects the price of labor is also odd.” That’s not my assertion. Commodity prices can certainly rise, can rise more than labor prices, and can rise when labor prices are falling. But it’s not just monetary policy that affects commodity prices, and to the extent monetary policy is raising them it should before too long be raising labor prices too.

In the long run, monetary policy can’t do much to affect the ratio of any price to any other price. In the short run it can have some effect. When an economy is depressed, for example, looser money can reduce unemployment and begin to raise some prices before it raises wages. When judging how monetary policy has worked in our country, though, we have a decent counterfactual to look at: The eurozone, which has followed a tighter policy. It doesn’t seem to be raising European living standards.

More Davis:

Prices are rising, they’re rising faster than wages, and they’re rising for items that comprise a large chunk of the budgets of working American families. Those are facts. The question is what to do about those facts. The subtext to all of the inflation critiques from the likes of Perry, Pethokoukis, and Ponnuru is that we should leave the Federal Reserve alone. Stop blaming the Fed for inflation, you guys. Please ignore that QE, QE2, QE3, and a multi-year zero interest rate policy, etc. were all intentionally designed to increase inflation, you guys. Just ignore all the different goods for which prices are rising really rapidly, you guys. Ignore the fact that higher prices and middling wages are eroding standards of living, you guys.

Unfortunately, the constant Federal Reserve apologetics are seriously clouding these pundits’ collective judgment about an increasingly important political issue: whether America’s current political class has what it takes to make rising standards of living — rather than just rising prices — the norm for American families again. . . .
Guys, we get it. You like the Fed. A lot. 
I don’t like the Fed. It has a terrible track record in general and in the Great Recession, as I’ve said many times. (I’m more hostile than most people in the sense that I give the Fed most of the blame for the Great Recession.) And I have no problem with noticing that prices for some things are rising faster than average–that’s sort of built-in to the concept of averages. But I think that if we want rising standards of living, we need rising real long-term growth rates, and (for example) more competition, choice, and accountability in the health and educational sectors. It’s no apology for the Fed to note that no policy change from it can generate those things.


Sign up for free NRO e-mails today:

Subscribe to National Review