Afternoon Must-Read: Greg Ip: The Inflation Panic

Greg Ip: The inflation panic: The spontaneous combustion theory of inflation: “I find the panic over inflation perplexing…

…Factual. Yes, core CPI inflation has rebounded to 2% from 1.6% in February…. What should we infer from this? Nothing…. Theoretical. If you have a forecast of higher inflation, it helps to have a theory of the inflation determination process…. Many critics think the prolonged period of low real rates and the large size of the Fed’s balance sheet are in and of themselves inflationary, but this is divorced from any consideration for why real rates are negative and the Fed’s balance sheet so large in the first place. Charlie Evans, president of the Federal Reserve Bank of Chicago, calls this ‘the spontaneous combustion theory of inflation… Households and businesses simply wake up one day and expect higher inflation is coming without any further improvement in economic fundamentals’…. Strategic…. Hoover Institution… scholars were deeply concerned…. Many cited the 1970s…. What these analyses ignore is the asymmetry of risks…. The Fed… knows how to get inflation back down…. By contrast, recent history shows how few effective tools central banks have for reversing inflation that falls too far…

June 26, 2014

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