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Don't fear inflation

Inflation isn't always and necessarily a bad thing. It's one of many variables in the economy, and its presence helps some groups of people and harms others. But that kind of nuance is getting lost in the present debate.

Why it matters: There are two well-defined inflation camps at this point. Both of them take for granted that inflation is, broadly speaking, a bad thing. But that's never true for everyone, and always depends on how you define it.

Where it stands: The messaging from the Fed and the Biden administration is clear. Consumer price inflation has been low — too low, and in fact — for many years. As we recover from the pandemic, it might be high for a while. But that's likely to be temporary, and nothing to worry about.

  • Inflation hawks, led by Larry Summers, disagree and warn it could accelerate beyond control. Invariably they conjure up images of the 1970s.

The big picture: Recent decades have seen a lot of the kind of inflation that's good at entrenching the upper-middle class. Asset-price inflation — a roaring stock market and housing market — has made the rich richer, while leaving much of the country behind. Rampant inflation in college tuition and health care costs has similarly privileged the few who can easily afford such things.

  • Wage inflation is disliked by corporations, but loved by workers.
  • Those big trends are left out of the consumer price index (CPI), which concentrates on smaller and arguably less important things, like the price of jewelry, or postage, or "sauces and gravies".

Be smart: The rate of increase of the CPI is definitely important. Inflation tends to help borrowers and hurt savers, for instance. As economic historian Rebecca Spang says in the Washington Post, it is generally welcomed by people who consider themselves to be producers, while being feared by those who think of themselves as consumers.

  • As Bloomberg's Joe Weisenthal points out, "inflation" is often used to mean a broad intuition that people "have to work longer, in more tenuous conditions, for a middle-class standard of living" — which is something much bigger than just price increases.

Context: Precisely becauseinflation happened so long ago, it has become much scarier than it probably should be.

  • If inflation is driven by wage hikes for people earning less than $60,000 per year,it's not even clear that it would be a net negative for the U.S.

Flashback: The 1970s were half a century ago, a world of oil crises and the Vietnam war and a truly astonishing number of aircraft hijackings. China was still decades away from disrupting the international labor market, and the internet was still mostly just a U.S. defense project.

The bottom line: Inflation wasn't the main reason why people disliked the 1970s. If the 2020s do see inflation, then the 1970s won't be the result.

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