The Vampire Theory of Inflation

The FOMC issued an opaque statement yesterday observing that the economy is continuing to expand at “a moderate pace,” though unemployment remains too high while inflation is falling. The statement attributes the weakness of the recovery, at least in part, to fiscal tightening, perhaps suggesting that the Fed would not, under these circumstances, tighten monetary policy if fiscal policy were eased.

Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Notice despite the neutral, matter-of-fact tone of the statement, there are two factually inaccurate, or at least misleading, assertions about inflation. First, while the assertion “inflation has been running somewhat below the Committee’s longer-run objective,” is not objectively false, the assertion ignores the steady downward trend in inflation for the past year, while sewing confusion with a gratuitous diversionary reference to “temporary variations that largely reflect fluctuations in energy prices.” By almost any measure, inflation is now running closer to 1% than to the Fed’s own 2% target.

Second, the statement asserts that longer-term inflation expectations have remained stable. Oh really? If we take the 10-year TIPS spread as a proxy for long-term inflation expectations, inflation expectations have been falling steadily since the mid-January to mid-March time frame, when the breakeven rate fluctuated in a narrow range between 2.5% and 2.6%, to a spread of 2.3% yesterday, the lowest since early September of last year.

The FOMC continues:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2% objective.

Well, here is my question.  If the FOMC “seeks to foster maximum employment and price stability,” and the FOMC itself anticipates that inflation over the medium term will likely be less than 2%, why, under the FOMC’s own definition of price stability as 2% inflation, is the FOMC proposing to do nothing — not a single wretched thing — to hit its own inflation target?

Under both elements of its dual mandate, the FOMC is unambiguously obligated to increase the rate of monetary accommodation now being provided. The FOMC asserts that unemployment is elevated; it also asserts, notwithstanding a pathetic attempt to disguise  that obvious fact, that inflation is below its target. Both conditions require increased monetary expansion. There is now no trade-off between inflation and unemployment, and no conflict between the Fed’s two mandates. So why can’t the Fed do what it is plainly obligated to do by current legislation? Pointing a finger at the President and Congress cannot absolve the Fed of its own legal obligation not to tolerate an inflation rate below that consistent with price stability when unemployment is elevated. Is there no one capable of extracting from the Chairman of the Federal Reserve Board an explanation of this dereliction of duty?

Interestingly enough, I happened to catch a piece (“Should we bring inflation back from the dead?”) on American Public Radio’s “Marketplace” last evening. After asking David Blanchflower of Dartmouth College and Kevin Jacques of Baldwin Wallace University about the potential benefits of moderate inflation in the current environment, reporter David Gura turned to Marvin Goodfriend, formerly of the Richmond Fed, and now at Carnegie-Mellon, for a contrary view. Here is how Goodfriend explained why more inflation would not be a good thing.

Of course, resurrecting inflation is not risk-free. Economist Marvin Goodfriend says this kind of thinking could lead the economy to overheat: “If a little inflation is good, maybe a little more inflation is better.” It is something that is hard to control.

Goodfriend tells his students at Carnegie Mellon University to remember something.

“Inflation doesn’t die,” he says. “It’s like a vampire.”

You can vanquish it with “determined policy,” Goodfriend explains. Inflation will creep back into its coffin. And then, when you least expect it, it can come back with a vengeance.

Whew! Talk about sophisticated economic analysis. But then again, Goodfriend’s students at Carnegie-Mellon are super bright, aren’t they? Could this be what Bernanke and his colleagues are thinking? The vampire theory of inflation? Say it ain’t so, Ben.

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18 Responses to “The Vampire Theory of Inflation”


  1. 1 Becky Hargrove May 2, 2013 at 2:35 pm

    I’d heard that copies of the book “When Money Dies” by Adam Fergusson had become quite valuable. But who would have thought they were worth the value of a Carnegie Mellon education!

  2. 2 Marcus Nunes May 2, 2013 at 3:01 pm

    David M Goodfriend is in fact a ‘Badfriend’. Twenty or so years ago he went on and on about inflation scares!He must be a fan of Terror & Vampire movies!
    I should have put a Vampire image in this post.
    http://thefaintofheart.wordpress.com/2013/05/01/the-fed-does-not-believe-it-can-offset-fiscal-policy/

  3. 3 nottrampis May 2, 2013 at 7:10 pm

    I do hope you are getting plenty of readers from downunder.

    The quality is never lacking here

  4. 4 David Glasner May 2, 2013 at 8:52 pm

    Becky, Thanks for pointing that out to me. But you can buy the Book on Amazon for 11 bucks.

    Marcus, Well, at least he’s consistent. Off topic, have you noticed a big increase in the number of spam comments not being blocked by WordPress. For a couple of months I’ve seen a steady increase, and in the last couple of days, the trickle is becoming a flood. About 13 in the last half an hour. Help!

    nottrampis, 14 yesterday and 21 today (so far). Thanks for saying so many nice things about me.

  5. 5 Christiaan Hofman May 3, 2013 at 4:14 am

    I always thought that high inflation was a consequence of an overheated economy, rather than the other way around. Or something that just pops up unexpectedly out of the ground when it’s dark. This guy has some seriously Serious economic model.

  6. 6 Marcus Nunes May 3, 2013 at 4:21 am

    David. I have not noticed ‘spam activity’ in my blog.
    Didn´t resist and put up a Vampire poster in my post:
    http://thefaintofheart.wordpress.com/2013/05/01/the-fed-does-not-believe-it-can-offset-fiscal-policy/

  7. 7 Jacques René Giguère May 3, 2013 at 5:15 am

    In the early 80′s when Volcker was fighting inflation at the cost of high unemployment ( which could not exist because the Philipps curve is vertical…) a House member told him that his constituents were not happy of his policies. To which Volcker answered” But my constituents are.”
    Fed’s constituents are not yopurs and mine either.

  8. 8 Becky Hargrove May 3, 2013 at 5:42 am

    David, I’m sure it’s some of the older prints that are valuable, and I’d read the book a couple of years ago… was just making an admittedly bad joke about the quality of education from Goodfriend’s class!

  9. 9 Peter K. May 3, 2013 at 11:13 am

    Volcker the Vampire Slayer killed inflation in the early 80s. Of course NPR didn’t challenge the Richmond Fedster on this.

    And Volcker could have done it in a more gradual and less painful manner, but they had to stamp out labor activism, which in the 1970s was out of control from their perspective.

  10. 10 Will May 3, 2013 at 1:17 pm

    “I happened to catch a piece… on American Public Radio’s ‘Marketplace’…”

    And there was your misstep! Listening to “Marketplace” is an error that seldom goes unpunished. While host Kay Ryssdal has a good radio voice and is certainly well intentioned, he doesn’t seem to have enough familiarity with economic thought to conduct more than a superficial treatment of the stories they cover. The inclusion of that “vampire” quotation is all too typical.

    Sadly, this seems to be a common feature of attempts to popularize economics. Exhibit B: the wildly popular “Keynes vs. Hayek” rap videos.

  11. 11 Tom Brown May 4, 2013 at 12:32 am

    David, I’ve never seen you so exercised before. Ha!…

    Regarding the Fed, perhaps Chairman Bernanke has been planning a long put-off trip to Texas, and he just *happened* to have recalled Governor Perry’s exposition of his own views regarding the subtleties of monetary policy last year:

    “If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.”

    Governor Perry’s line of reasoning here might appear somewhat crude and back-woodsy on first read, but perhaps Ben (uncommon scholar that he is!), found a certain compelling wisdom to it upon further contemplation!

  12. 12 Tom Brown May 4, 2013 at 1:16 am

    Something about that Perry quote made me think of this:

    http://www.veoh.com/watch/v20888753eaSC6FEd?h1=SNL+-+Danger+Probe+-+ProBAtion!+For+Paul+W

    “You got a lead pipe back there?”

    Ha!

  13. 13 Tas von Gleichen May 4, 2013 at 1:56 pm

    This is all we get at the moment huge amounts of money printing by central banks around the world. On top of that lowering interest rates to just about zero. This is surely going to blow up somehow. Just look at the stock market breaking new highs after new once.

  14. 14 Benjamin Cole May 5, 2013 at 9:01 pm

    Remember, I am a serious economist with a PhD from a major university.

    The only thing I can think about is inflation. The only threat is inflation. Inflation is crafty, dangerous, remorseless, the evil incarnate. And lethal to our way of life, should it ever get loose again. Inflation above 1 percent is bad, above 2 percent it becomes unbearable. Truck drivers pull over to the side of the road, unable to steer anymore if inflation is above 2 percent. It wrecks their will to earn a living. I would rather have my arms and legs ripped off than see 3 percent inflation.

    Did you know there is a case for mild deflation based on productivity gains? That idea gives me priapism.

    We must endure years, maybe a decade, or maybe more of recession and weak growth to beat inflation. Even when it is already beaten and dead, because inflation might somehow get loose.

    I can go to Japan and lecture them on the evils of inflation. They need to know the risks.

    And remember, only serious economists, in sinecure positions, should be in charge of monetary policy and monetary policy debate.

  15. 15 David Glasner May 9, 2013 at 9:05 am

    Christiaan, Inflation can have many causes, many of which, like an overheated economy, are monetary. But Goodfriend certainly does have a unique take on it.

    Marcus, Maybe I’m just a spam attractor. That’s some poster!

    Jacques, I was around then, and no one believed that there would not be a transitional increase in unemployment if inflation fell. But the size of the increase was certainly shocking. In retrospect, it could be viewed as an investment in the Fed’s credibility capital. Whether the investment was worth it is an interesting, but ultimately unanswerable, question. The exchange between Volcker and the Congressman sounds vaguely familiar but I can’t say that I actually remember it.

    Becky, No apologies, please. I wasn’t commenting on the joke, just pointing out that the book is easily available on Amazon.

    Peter K., I think that Volcker sincerely believed in what he was doing and I don’t think that stamping out labor activism was part of his agenda. The decline of the labor movement has all kinds of causes, largely associated with the relative decline of the manufacturing sector which was more or less inevitable. To pretend otherwise is just ideological posturing.

    Will, I agree that Marketplace is not to go to for any kind of even semi-serious discussion of economic policy. One of my most popular posts on that video: Keynes v. Hayek: Enough Already.

    Tom, I try to keep my composure at all times, but occasionally it’s a struggle. I doubt that this was my first outburst. Thanks for the link, it’s been a while. Belushi’s pal actually looks just like Perry.

    Tas, I say just sit back and enjoy it.

    Benjamin, What people need to learn is that there is no one size fits all for inflation.

  16. 16 Tom Brown May 9, 2013 at 3:00 pm

    David, funny you should say that… “Belushi’s pal” is now a US senator from Minnesota, Al Frankin! Ha!

  17. 17 Tom Brown May 9, 2013 at 3:35 pm

    … sorry, that should have been “Franken”:

    http://en.wikipedia.org/wiki/Al_Franken


  1. 1 The Fed does not believe it can offset fiscal policy! | Historinhas Trackback on May 3, 2013 at 4:18 am

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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