Meltzer: Don't Stop Worrying About Inflation

In a November column, I noted how last summer's worries about runaway inflation had transmogrified into anxieties about deflation. Writing in today's New York Times, Carnegie Mellon economist (and former Reagan adviser) Allan Meltzer says we were right the first time around:

Some of my fellow economists, including many at the Fed, say that the big monetary goal is to avoid deflation. They point to the less than 1 percent decline in the consumer price index for the year ending in March as evidence that deflation is a threat. But this statistic is misleading: unstable food and energy prices may lower the price index for a few months, but deflation (or inflation) refers to the sustained rate of change of prices, not the price level. We should look instead at a less volatile price index, the gross domestic product deflator. In this year's first quarter, it rose 2.9 percent—a sure sign of inflation.

Besides, no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation.

Meltzer, who reviews the Federal Reserve's difficult, unpopular, and ultimately successful effort to stabilize prices in the early 1980s, worries about the central bank's tendency to overstimulate a sluggish economy with easy credit and low, low interest rates, giving little thought to the inflationary hangover. Robert J. Samuelson chronicled Fed Chairman Paul Volcker's triumph over inflation in the January issue of Reason.