Kudlow tries to tamp down inflationary zeal

Lawrence Kudlow‘s latest column posted at Human Events questions new Federal Reserve chair Janet Yellen’s apparent interest in sparking the economy through inflation.

Will somebody please explain to me how rising inflation is somehow going to extricate us from the tepid economic recovery? I don’t get it.

It used to be hypothesized that low inflation was the key to high economic growth. For everybody in the economy, low inflation was a tax cut. Conversely, rapidly rising prices were thought to penalize the economy by placing a tax-hike effect on investors, businesses and families. It was this logic that spurred Paul Volcker (especially) and then Alan Greenspan to labor mightily in the 1980s and 1990s to bring inflation down.

The Fed’s favorite inflation measure — the personal consumption deflator — has risen about 1 percent over the past year, as has the consumer price index. When I grew up professionally in the 1970s, first as a New York Fed staffer and then as a Wall Street economist, no one — and I mean no one in their right mind — would ever have dreamed that double-digit inflation could be brought down to 1 percent. But Janet Yellen is now telling us that low inflation is a sign, and perhaps even a cause, of the weak economy.

The Wall Street Journal headline last week was “Fed Shows Growing Worry about Low Inflation.” As the narrative unfolds, both the Federal Reserve and the IMF blame low inflation for small wage gains, excess business capacity and soft global demand.

Not for one nanosecond should anybody believe this nonsense.

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