Wednesday, January 23, 2013

In inflationary times, everything is inflationary

Joshua Wojnilower quotes Scott Sumner:

higher interest rates are inflationary

and Woj replies:

lower interest rates are inflationary.

Well, sure. We live in inflationary times.


Luke Smith said...

Higher interest rates cannot by definition be inflationary. There is an inverse relationship between interest rates and debt prices.

Greg said...

Inflation isnt simply the price of debt though. High interest rates can lead to higher interest income, higher incomes no matter the source will be inflationary

Greg said...

Let me add though that I am not someone who frets inflation. Higher wages leading to higher prices can actually make everyone better off. Yes there is a point where it becomes too much but America has NEVER reached that point since the civil war imo.

Joshua Wojnilower said...


Very clever...and true in some respects.

My use of the term "inflationary" has cause a lot of confusion (for which I'm responsible). My intention was to imply that the price level would be higher than would be the case without the action (fiscal or monetary), not that any of the actions discussed would create a continuous rise in the price level. Separately, I should have specific whether I was referring to the general price level or asset prices.

From my perspective, the most valid reason for arguing that higher interest rates create inflation is if one assumes cost-plus pricing for the economy. Higher rates would add to the overhead of production leading producers to increase prices. This may be valid, although I think it would eventually lead to a debt deflationary period. Also, higher interest rates could deter money away from assets and into consumer goods/services, which would also create general inflation (with asset price deflation).

This story, combined with the massive rise in debt overhead, supports the view that moderate inflation will persist in the face of debt deflation.

I'm curious to know your thoughts on the matter.