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The following was the lead article on the front page of today's New York Times:<br>==========<br><div><br>WASHINGTON — Inflation is widely reviled as a kind of tax on modern
life, but as Federal Reserve policy makers prepare to meet this week,
there is growing concern inside and outside the Fed that inflation is
not rising fast enough.
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<h6><a href="http://www.nytimes.com/interactive/2013/10/27/business/economy/inflation-falls.html?ref=economy">
Inflation Fails</a></h6>
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<p>
Some economists say more inflation is just what the American economy
needs to escape from a half-decade of sluggish growth and high
unemployment. </p><p>
The Fed has worked for decades to suppress inflation, but economists,
including Janet Yellen, President Obama’s nominee to lead the Fed
starting next year, have long argued that a little inflation is
particularly valuable when the economy is weak. Rising prices help
companies increase profits; rising wages help borrowers repay debts.
Inflation also encourages people and businesses to borrow money and
spend it more quickly. </p><p>
The school board in Anchorage, Alaska, for example, is counting on
inflation to keep a lid on teachers’ wages. Retailers including Costco
and Walmart are hoping for higher inflation to increase profits. The
federal government expects inflation to ease the burden of its debts.
Yet by one measure, inflation rose at an annual pace of 1.2 percent in
August, just above the lowest pace on record. </p><p>
“Weighed against the political, social and economic risks of continued
slow growth after a once-in-a-century financial crisis, a sustained
burst of moderate inflation is not something to worry about,” Kenneth S.
Rogoff, a Harvard economist, <a title="The article." href="http://www.project-syndicate.org/commentary/the-benefits-of-higher-inflation-by-kenneth-rogoff">wrote recently</a>. “It should be embraced.” </p><p>
The Fed, in a break from its historic focus on suppressing inflation,
has tried since the financial crisis to keep prices rising about 2
percent a year. Some Fed officials cite the slower pace of inflation as a
reason, alongside reducing unemployment, to continue the central bank’s
stimulus campaign. </p><p>
Critics, including Professor Rogoff, say the Fed is being much too meek.
He says that inflation should be pushed as high as 6 percent a year for
a few years, a rate not seen since the early 1980s. And he compared the
Fed’s caution to not swinging hard enough at a golf ball in a sand
trap. “You need to hit it more firmly to get it up onto the grass,” he
said. “As long as you’re in the sand trap, tapping it around is not
enough.” </p><p>
All this talk has prompted dismay among economists who see little
benefit in inflation, and who warn that the Fed could lose control of
prices as the economy recovers. As inflation accelerates, economists
agree that any benefits can be quickly outstripped by the disruptive
consequences of people rushing to spend money as soon as possible.
Rising inflation also punishes people living on fixed incomes, and it
discourages lending and long-term investments, imposing an enduring
restraint on economic growth even if the inflation subsides. </p><p>
“The spectacle of American central bankers trying to press the inflation
rate higher in the aftermath of the 2008 crisis is virtually without
precedent,” Alan Greenspan, the former Fed chairman, wrote in a new
book, “<a title="A review of the book." href="http://www.nytimes.com/2013/10/21/books/the-map-and-the-territory-by-alan-greenspan.html">The Map and the Territory</a>.” He said the effort could end in double-digit inflation. </p>
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The current generation of policy makers came of age in the 1970s, when a
higher tolerance for inflation did not deliver the promised benefits.
Instead, Western economies fell into “stagflation” — rising prices,
little growth. </p><p>
Lately, however, the 1970s have seemed a less relevant cautionary tale
than the fate of Japan, where prices have been in general decline since
the late 1990s. Kariya, a popular instant dinner of curry in a pouch
that cost 120 yen in 2000, can now be found for 68 yen, <a title="The post." href="http://blog.japantimes.co.jp/yen-for-living/deflation-watch-retort-curry/">according to the blog Yen for Living</a>. </p><p>
This enduring deflation, which policy makers are now trying to end, <a title="About the retreat." href="http://www.nytimes.com/2010/10/17/world/asia/17japan.html?_r=1&ref=business&pagewanted=all">kept the economy in retreat</a>
as people hesitated to make purchases, because prices were falling, or
to borrow money, because the cost of repayment was rising. </p><p>
“Low inflation is not good for the economy because very low inflation
increases the risks of deflation, which can cause an economy to
stagnate,” the Fed’s chairman, Ben S. Bernanke, a student of Japan’s
deflation, said in July. “The evidence is that falling and low inflation
can be very bad for an economy.” </p><p>
There is evidence that low inflation is hurting the American economy. </p><p>
“I’ve always said that a little inflation is good,” Richard A. Galanti,
Costco’s chief financial officer, said in December 2008. He explained
that the retailer is generally able to expand its profit margins and its
sales when prices are rising. This month, Mr. Galanti told analysts
that sluggish inflation was one reason the company had reported its
slowest revenue growth since the recession. </p><p>
Executives at Walmart, Rent-A-Center and Spartan Stores, a Michigan
grocery chain, have similarly bemoaned the lack of inflation in recent
months.
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<h6><a href="http://www.nytimes.com/interactive/2013/10/27/business/economy/inflation-falls.html?ref=economy">
Inflation Fails</a></h6>
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“Let me just remind everyone that inflation falling below our target of 2
percent is costly,” Charles L. Evans, the president of the Federal
Reserve Bank of Chicago, <a title="The speech." href="http://www.chicagofed.org/webpages/publications/speeches/2013/10_17_13_how_much_longer_university_wisconsin.cfm">said in a speech</a>
in Madison, Wis., this month. “If inflation is lower than expected,
then debt financing is more burdensome than borrowers expected. Problems
of debt overhang become that much worse for the economy.” </p><p>
Inflation also helps workers find jobs, according. to <a title="The paper." href="http://www.brookings.edu/%7E/media/files/programs/es/bpea/1996_1_bpea_papers/1996a_bpea_akerlof_dickens_perry_gordon_mankiw.pdf">an influential 1996 paper</a>
by the economist George Akerlof and two co-authors. Rising prices
allows companies to increase profit margins quietly, by not raising
wages, which in turn makes it profitable for companies to hire
additional workers. Lower rates of inflation have the opposite effect,
making it harder to find work. </p><p>
Companies could cut wages, of course. But there is ample evidence that
even during economic downturns, companies are reluctant to do so.
Federal data show a large spike since the recession in the share of
workers reporting no change in wages, but a much smaller increase in
workers reporting wage cuts, according toan analysis by the Federal Reserve Bank of San Francisco.There is, in practice, an invisible wall preventing pay cuts. The
standard explanation is that employers fear that workers will be angry
and therefore less productive. </p><p>
“I want to be really careful about advocating for lower wages because I
typically advocate for the other side of that equation,” said Jared
Bernstein, a fellow at the left-leaning Center on Budget and Policy
Priorities and a former economic adviser to Vice President Joseph R.
Biden Jr. “But I think higher inflation would help.” </p><p>
The Anchorage school board, facing pressure to cut costs because of a
budget shortfall, began contract negotiations with its 3,500 teachers
this year by proposing to freeze rather than cut wages. The final deal,
completed last month, gives the teachers raises of 1 percent in each of
the next three years. </p><p>
Teachers, while not thrilled, described the deal as better than a pay
cut. But it is likely, in effect, to cut the teachers’ pay. Economists
expect prices to rise about 2 percent a year over the next three years,
so even as the teachers take home more dollars, those dollars would have
less value. Instead of a 1 percent annual increase, the teachers would
fall behind by 1 percent a year. </p><p>
“We feel like this contract still allows us to attract and retain
quality educators,” said Ed Graff, the Anchorage school district
superintendent. </p><p>
In June, Caterpillar, the industrial equipment maker, persuaded several
hundred workers at a Wisconsin factory to accept a six-year wage freeze.
The company described the workers as overpaid, but it did not seek
direct cuts. </p><p>
The slow pace of inflation, however, minimizes the benefits. Seeking
further savings, Caterpillar has since laid off almost half of the
workers. </p>
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