Stagflation and boomflation – Econlib

Inflation is a period where the price index rises. But the price index could rise for all sorts of reasons; So it makes no sense to study the effect of “inflation” on any other variable. That effect will always depend on the cause of inflation.

David Beckworth recently instructed me in a lecture Lael Brainard:

Although national data does not directly distinguish the differential effects of inflation by household income groups, various evidence suggests that low-income households feel the burden of disproportionately high inflation. Low-income families spend a large portion of their income on necessities; There are small financial cushions; And the ability to switch to lower priced options may be less. Arthur Burns noted in the late 1960s that “there can be little doubt that poor people … are the main victims of inflation.”

Today, inflation is very high, especially for food and petrol. All Americans are dealing with high prices, but the burden is especially great for families with more limited resources. This is why reducing inflation is our most important task, where maintaining a recovery that includes everyone. This is vital to sustaining the purchasing power of American families.

Brainard is right to say that we need to reduce inflation, but the rest of the analysis makes little sense.

Here it may be helpful to distinguish between two broad types of inflation, stagflation and boomflation. Stagnation occurs when the short-term supply curve shifts to the left. This reduces the actual output and the actual income, while raising the price level. Inflation occurs when aggregate demand shifts to the right, increases real output and real income (in the short term), increases inflation. The late 1960s were an example of boomflash while 1974 was an example of stagflash. (Each of us has something today.)

In the late 1960s, Arthur Burns suggested, “there can be little doubt that poor people … are the main victims of inflation.” In fact, boomflation Increases Real income in the short term, including the real income of the poor. In fact, the 1960s saw the largest decline in poverty in the history of the United States. Inflation was bad in the late 1960s, and should have been prevented by tougher Fed policy. But it wasn’t as bad as it hit the poor (late 1960s); It was bad because it greatly increased economic instability in the 1970s.

In contrast, inflation hurts the living standards of the poor. But the decline in quality of life is caused by the “stagnation” part of stagflation, not the “swelling” part of stagflation. Given the existence of adverse supply pressures, a non-accommodative Fed policy that prevents any temporary increase in overall inflation will hurt the poor. Even more than stagflation. I would add that stagflation hurts both the rich and the poor, whereas boomflation helps both the poor and the rich in the short run and hurts both the rich and the poor in the long run. Income inequality is not an issue here.

Whenever you encounter any research on the “effects of inflation”, run for the hill. It can be completely nonsense, a practice of reasoning from price change. It would be as foolish as a survey to assess the impact of high oil prices, without first confirming whether the price increase was due to higher or lower oil demand. In the former case, the use of oil will increase. In the latter case, oil consumption will be reduced. Or a study looking at the effects of high interest rates, without first considering why interest rates have risen. Tight money? High inflation? A booming economy?

PS Did I have to invent a word to post this? (Boomflation.) Also note that there is no word for “NGDP growth rate” in the economic profession. When a science lacks words for the most important concepts in their field, it gives a nice indication that the subject is hopelessly confused.

PPS. Short version of this post: NRFPC

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