Worried about Inflation

One member of the Federal Reserve board of governors is worried about inflation and has voted to raise interest rates for the last two months. The New York Times writes about how the president of the Federal Reserve Bank of Richmond is worried about inflation.

Mr. Lacker has long expressed skepticism about the benefits of the Fed’s stimulus campaign, and he has been concerned that inflation will begin to rise more quickly as the economy gains strength.

Mr. Lacker refers to his views as “old-fashioned,” emphasizing he sees little new in the current environment. He does not think that the relationship between employment and inflation has changed; that the Fed should consider other issues, like financial stability, in setting monetary policy; or that the economic health of other countries should play a larger role in the Fed’s deliberations.

It’s too soon to tell [how quickly rates need to go up]. I think there’s a chance we are behind the curve, but it will be a year or two before we figure that out. With the anticipation that we’re likely to raise rates gradually and the committee having signaled that expectation, I think we have room to accelerate if we find out that we wish we’d started earlier.

Mr. Lacker believes that unemployment is at a baseline low and that we will be seeing wage inflation soon and after that price inflation. The concern of Fed members is that if they act too late it will be difficult to control increasing inflation.

It Is Time

Mr. Lacker is not the only one in the Fed who is worried about inflation. According to Bloomberg Business, the St. Louis Federal Reserve Bank president says that emergency measures such as zero rates are no longer needed as the unemployment rate has reached the Fed’s goal. James Bullard advocates beginning to normalize the policy rate in the U.S.

Federal Reserve Bank of St. Louis President James Bullard said that the U.S. central bank should raise interest rates from near zero because emergency policies are not needed with the labor market and inflation near to the central bank’s goals.

“I have been an advocate of beginning to normalize the policy rate in the U.S.,” Bullard said in a speech in Washington on Thursday. “The U.S. economy is quite close to normal today based on an unemployment rate of 5 percent, which is essentially at the committee’s estimate of the longrun rate, and inflation net of the 2014 oil price shock only slightly below the committee’s target.”

Remember that the Fed always implies what it might do. It would appear that the central bank is getting ready to raise rates next month and is working to prepare everyone.

Good versus Bad Inflation

Nasdaq asks if U.S. inflation is too low and along the way discusses good versus bad inflation.

“[G]ood” inflation can be viewed as price increases resulting from accelerating economic activity and a strong labor market, and thus, most likely to further support rising wages and employment. This sort of inflation most often shows up in expenditure categories such as vehicles, recreation, transportation, medical care, home furnishings and housing. In other words, price rises in these categories are likely a result of an improving economy. In contrast, “bad” inflation can be viewed as rising prices resulting from supply shocks that aren’t necessarily indicative of economic strength in the U.S. This sort of inflation tends to show up in expenditure categories such as food, energy, motor fuel and apparel. Prices for these expenditures can, and do, rise with less of a tie to expected growth in the economy, and therefore such price rises tend to detract from incomes more than they’re likely to support them.

Thus inflation can be a result of a healthy economy and, within reason, a good thing. However, if oil prices go back up it could drive up inflation and be detrimental to the economy. If you want to be worried about inflation make it the bad kind.