Inflation? What inflation?

Posted by Deepish Thinker on September 18, 2013
Economics

Paul Krugman, as he’s rather fond of doing, has been pointing out that predictions that loose monetary policy would spark inflation have so far proved embarrassingly inaccurate.

“Republicans predicted poor economic performance under Obama. And to be fair, the economy has not done particularly well. The crucial point, however, is the nature of the poor performance. Republicans confidently predicted Weimar 2.0 — soaring interest rates and inflation. They lambasted not just Obama but Bernanke — in fact, their attacks on Fed policy had more passion than their attacks on the stimulus, which after all didn’t last long.”

An interesting question to consider is why predictions of high inflation, which many conservative pundits made, have been so wrong.

Perhaps the simplest answer is that they assumed loose monetary policy would work.

To date the results have been unimpressive.  Inflation has remained quiescent in large part because cheap money hasn’t resulted in dramatic increases in lending and consumption.

This leads to the somewhat ironic situation that the advocates of tighter monetary policy overestimated the threat of inflation in large part because they believed the advocates of looser monetary policy, who overestimated the growth impacts.