Monday, March 7, 2011

Shades Of Arthur Burns

One of the reasons why inflation got out of hand in the 1970s was Fed chair Arthur Burns inflating in response to the oil shocks. He did so because the oil hikes threatened growth. Needless to say, that response exacerbated inflation back then.

Now, one member of the FOMC - Atlanta Fed president Dennis Lockhart - said that the Fed should pursue the same policy again.
Lockhart emphasized that much would depend on the particular circumstances, especially whether higher energy prices were fully passed along to customers and whether consumers and businesses were beginning to act as if inflation would inevitably accelerate as a result.

So far, inflationary expectations remain controlled, largely because wages aren’t rising. “Wage accommodation of rising prices has the effect of institutionalizing and embedding inflation,” Lockhart said. “However, I do not see widespread wage pressures developing any time soon in the current circumstances of upwards of 20 million people either out of work or working part-time for economic reasons.”

Lockhart said his opinion is informed by research done by economics professor James Hamilton of the University of California at San Diego, who has found that episodes of prolonged and higher energy prices are almost invariably followed by recession

It's as if he wanted inflation. Needless to say, he denied that the Fed had any major responsibility for the surge in commodity prices.

Back in the early 1970s, it was held that inflation could not get serious when there was high
unemployment. Now, it's held that inflation can't get serious because wages aren't rising that much. The first proved to be a mistake. Will the second?

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