Is Inflation Always Bad?

The current efforts by the Federal Reserve Bank to bring down the rate of inflation by imposing a rapid rise in interest rates if a proven formula for a quick remedy for reducing that rate, albeit at the likely cost of a number of unintended consequences. Those consequences being; bringing on a recession, an increase in the unemployment rate, a decrease in government revenues, an increase in the cost of the national debt, an increase in bank failures and an increase in business bankruptcies, especially today in commercial real estate. Is this unintended economic damage worth the longer-term benefits? The answer to this question is nuanced at best and depends on what factors lead to the onset of the current inflationary burst.

The current inflationary burst is being widely attributed to the extraordinary spending by the U.S Government related to the Covid Pandemic. The presumption is that this spending was excessive. The war in the Ukraine is also given because of its effect on food and energy prices. A third explanation is that the Federal Reserve Bank was too slow in implementing its inflation fighting protocol because it perceived the problem as transitory. While all these factors are probably true, it’s not the whole story. What has been ignored in this picture is the effects of a pre-pandemic economy running for a number of years at interest rates at or near zero percent. Since we have never seen such a phenomenon, it is worth considering what were going to be the likely longer term economic consequences of this situation.