Economy & Policy

Is Inflation Good for the Economy?

By Feb. 03, 2011
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(Photo: Getty Images)

The Federal Reserve has come under a lot of heat in the past few months for its plan to flood the market with cash by buying $600 billion of US Treasury bonds. The main criticism is that it will cause inflation. And indeed, the United Nations on Thursday said its monthly food price index had reached an all time high. Even Sarah Palin has called out Fed Chairman Ben Bernanke. But there are growing signs that inflation might not be as bad as people think. In fact, rising inflation, or at least the fear of it, might be the best thing this economy has going for it these days. It might even boost employment. Call it, stimulus part trois. Here’s why:

First of all, inflation is not something that is an unwanted byproduct of the Fed’s plans to boost the economy. Bernanke is actively trying to boost inflation. People were freaking out a few months ago when they realized this, and thought Bernanke had really lost his senses. Instead, I predicted that he was doing exactly the right thing and that rising inflation would be a good thing for the economy and not something that was bound to lower our standard of living so much we could no long afford indoor plumbing. Here’s a bit from a post a few months ago where I backed the Bernanke and, again, predicted inflation would be good for us:

when inflation is low, there’s another reason people don’t spend. Why buy something now when I can buy it a year from now at the same price, or even better maybe at a lower price.  So inflation can been a big driver of consumption, and boosting spending mainly by companies that seem to be sitting mounds of cash is exactly what we need right now.

Well, it turns out that is exactly what is happening, at least according to an article in Thursday’s Wall Street Journal.
Companies contending with rising commodity prices are stockpiling rubber tires, cotton clothing and other goods, a maneuver that is aimed at insulating them from inflation but also could contribute to it.
The article talks about manufacturers stocking on up raw materials because they are trying to buy now before prices rise further. This might be worrisome news for the economy if those suppliers were only stock piling because of inflation. But that doesn’t seem to be the case either. Inflation is not only causing them to buy more, it is also boosting their sales.
At the same time, McCormick’s grocery-store customers placed about $10 million of orders in last year’s fourth quarter that they would have made this year, in order to get ahead of a 3% price increase, company officials estimate. The company reported a 5.6% increase in sales; without those added purchases, the increase would have been 3.9%.
Of course, the fear here is that this is temporary, and that rising prices eventually causes people to stop buying things. But we are a long way away from that. Right now, much of the inflation that we are seeing is in commodities and raw food prices, and is not causing a rise in much of the finished goods that we buy off the shelves, meaning wheat is rising rapidly, but the price of bread has barely budged. Again, this could be seen as a bad thing, if companies have to pay more for their materials but can’t raise prices. The result will be squeezed profits. But at a time when corporate profits are rising faster than jobs, smaller profits and rising demand sounds like a good thing.