My Question for Ben Bernanke: What if Inflation Were 8.2 Percent?

A blog about business and economics.
June 20 2012 2:27 PM

My Question for Ben Bernanke: What If Inflation Were 8.2 Percent?

Federal Reserve Chairman Ben S. Bernanke speaks during a hearing of the Joint Economic Committee on Capitol Hill June 7, 2012 in Washington, D.C.

Photo by Brendan Smialowski/AFP/GettyImages

If I had a chance to ask Federal Reserve Chairman Ben Bernanke a question at his press conference today, this is what I would want to know: "Suppose that inflation were 8.2 percent and the unemployment rate was at or below 2 percent, what would you do?"

The answer, obviously, is tighter money. But that wouldn't just mean an operational action to raise interest rates. You would, of course, raise interest rates. But expectations matter. If people thought that as soon as unemployment lingered above 2 percent for a month or two that rates would come down again, then inflationary expectations would never be whipped. To implement a tight money policy that worked, Bernanke would need to lecture a little bit. He'd have to say that while of course nobody wants to see unemployment go higher if you want to bring inflation down you have no choice but to tolerate somewhat higher unemployment. He would explain that the inflation isn't just annoying, but that over the long term it's quite damaging to the real growth prospects of the economy slowly but surely eroding the bases of American prosperity. Higher unemployment would be a bitter pill to swallow, but all things considered it would be the best choice for the country and the whole purpose of giving central banks operational independence is to let them make those kind of tough calls.


What we saw today from the Fed was the reverse of that.

The central bank clarified that it is fanatically committed to holding inflation close-to-but-below two percent, and while it's happy to speak many words about output and employment it basically doesn't care. Bernanke had various remarks to make about housing policy and mortgage finance and I agree with some of those sentiments. But recall that if we had massively expansionary fiscal policy and cleaned up the mortgage situation and suddenly started adding 400,000-500,000 jobs a month that prices would go up. With 8 percent inflation and 2 percent unemployment, you can't curb inflation unless you're willing to tolerate some joblessless. With 2 percent inflation and 8 percent unemployment, you can't curb joblessness unless you're willing to tolerate some inflation. If millions of people get jobs, get their own places to live, start commuting, etc., the prices of some stuff will go up. If you want to keep prices low, you have to condemn us to years more of mass unemployment.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



Slate Plus Early Read: The Self-Made Man

The story of America’s most pliable, pernicious, irrepressible myth.

Rehtaeh Parsons Was the Most Famous Victim in Canada. Now, Journalists Can’t Even Say Her Name.

Mitt Romney May Be Weighing a 2016 Run. That Would Be a Big Mistake.

Amazing Photos From Hong Kong’s Umbrella Revolution

Transparent Is the Fall’s Only Great New Show

The XX Factor

Rehtaeh Parsons Was the Most Famous Victim in Canada

Now, journalists can't even say her name.


Lena Dunham, the Book

More shtick than honesty in Not That Kind of Girl.

What a Juicy New Book About Diane Sawyer and Katie Couric Fails to Tell Us About the TV News Business

Does Your Child Have Sluggish Cognitive Tempo? Or Is That Just a Disorder Made Up to Scare You?

  News & Politics
Sept. 29 2014 11:45 PM The Self-Made Man The story of America’s most pliable, pernicious, irrepressible myth.
Sept. 29 2014 7:01 PM We May Never Know If Larry Ellison Flew a Fighter Jet Under the Golden Gate Bridge
Dear Prudence
Sept. 30 2014 6:00 AM Drive-By Bounty Prudie advises a woman whose boyfriend demands she flash truckers on the highway.
  Double X
Sept. 29 2014 11:43 PM Lena Dunham, the Book More shtick than honesty in Not That Kind of Girl.
  Slate Plus
Slate Fare
Sept. 29 2014 8:45 AM Slate Isn’t Too Liberal, but … What readers said about the magazine’s bias and balance.
Brow Beat
Sept. 29 2014 9:06 PM Paul Thomas Anderson’s Inherent Vice Looks Like a Comic Masterpiece
Future Tense
Sept. 30 2014 7:36 AM Almost Humane What sci-fi can teach us about our treatment of prisoners of war.
  Health & Science
Bad Astronomy
Sept. 30 2014 7:30 AM What Lurks Beneath The Methane Lakes of Titan?
Sports Nut
Sept. 28 2014 8:30 PM NFL Players Die Young. Or Maybe They Live Long Lives. Why it’s so hard to pin down the effects of football on players’ lives.