Inflation: Not So Bad?
ROBERT SIEGEL, Host:
The Labor Department said today that prices paid in July to producers, such as factories had their biggest increase in six months. That's a number that fits into the mix when calculating inflation.
SIEGEL: Floyd Norris, welcome to the program.
FLOYD NORRIS: Thank you.
SIEGEL: And let's start with the wisdom that's driven economic policy, I think since we all learned about Germans in the 1920s pushing wheelbarrows full of money, because inflation had risen so far, so fast. Isn't Inflation what we're all supposed to be against?
NORRIS: Interest rates went sky-high, and that made Paul Volcker, who was then the chairman of the Fed, first a national villain and then a hero when it worked.
SIEGEL: He wrung inflation out of the economy. For decades, we thought that was a huge success, so what's the case where perhaps now having some more inflation?
NORRIS: Well, the case partially, is that the Fed, I think, did not understand what they should count in inflation or what they shouldn't count. They wanted to count the stuff in the Consumer Price Index and pretty much nothing else. And as a result, when you had asset price inflation, they looked the other way, thought it was irrelevant, and we ended up with the housing boom.
SIEGEL: And what you're saying is, as we were surrounded with houses that were getting more and more expensive every year, that wasn't considered part of the inflation rate.
NORRIS: No. No. The Fed believe that inflation was under control. In fact, the way they counted house price inflation in the Consumer Price Index is they looked at rental cost. Now, house prices were going way beyond what it cost to rent houses, which some people thought was a sign things were getting out of control. But as far as the CPI went, it meant that the prices weren't rising, so there was no reason to be concerned.
SIEGEL: We've been living in an economy with officially almost no inflation. If there were, say, four or five percent inflation, how would life be different? What would be the upside of having that inflation?
NORRIS: Well, one of the upsides is that inflation, your debt, relative to your income, comes down. And - but what would happen at that point, if it worked, is that homes that are now underwater - because people owe a lot more than their worth - would get closer to being level. So people who now have no hope of ever having their house worth what they owe on it, would have some more hope.
SIEGEL: Well, I understand that if I were upside down $100,000 on a four-bedroom house in Phoenix, I would think this could be a really good idea. On the other hand, if I was sitting on $10 million in the bank, I would think, well, this inflation is going to erode the value of what I have.
NORRIS: Well, and that, certainly, is what happened in the past with inflation. If you're sitting with a $10 million in the bank right now, you're getting approximately zero interest on it. And I - it seems to me you're being robbed anyway, because savers really have been hurt by the extended period of low interest rates.
SIEGEL: Does it strike people who follow monetary policy or who make it that you can manage a modest inflation; that you can have a target of, say, four or five percent and then reign it in when starts getting too high, or is the danger here that before you know it, there's 10 percent inflation and everybody's dollars are worth that much less?
NORRIS: Certainly, people think that is a possibility, and that is what seemed to happen back in the '70s. Part of this is inflationary expectations. If people do expect prices to rise, they will act in certain ways that are sometimes not good. If you're worried about inflationary expectations taking hold in the economy, it seems to me that it's a worry that isn't going to happen real soon.
SIEGEL: Well, Floyd Norris, thanks a lot for talking with us today.
NORRIS: Thank you.
SIEGEL: Floyd Norris, who is chief financial correspondent for The New York Times.
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