An Urban's Rural View

Who's Afraid of the Big Bad Inflation?

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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Inflation has been running at well below a 2% annual rate yet inflation fears are vexing financial markets. Are the markets right to be worried? Should farmers and ranchers be?

Perhaps an even better question might be, "Should anyone be worried?" After all, economists have been saying for years that some inflation is both inevitable and necessary.

The Federal Reserve Board has had a 2% inflation target since 2012 and says it would be willing to tolerate inflation above 2% for a while in compensation for all the years below 2%. In many recent years, deflation has seemed a bigger problem than inflation.

What's so bad about inflation, anyway, then?

That's a question you're more likely to ask if you don't remember the 1970s and early 1980s. My perspective on inflation was shaped by having covered the economy as a reporter during those years.

I was hired by the Wall Street Journal right out of college in May 1969. At the time the paper was running a series of front-page stories under the rubric "How We Live." The stories were profiles of the kind of people WSJ readers were thought to be. The common thread was they all had an income of at least $25,000 a year.

In 1969, $25,000 was upper-middle-class territory. It certainly seemed upper-middle-class to me. My Journal starting salary was less than $10,000 a year. But with inflation heating up, $25,000 wouldn't be upper-middle-class for long.

Five years later, with inflation boiling, the Journal ran another front-page series, this one under the rubric "The Cost of Living." I wrote the first story, a profile of a Maryland state trooper struggling to keep up with rising prices and feed a family of four. Inflation had forced him to borrow $1,000 to meet expenses. In those days $1,000 was a scary debt for a policeman making $12,000-a-year.

In August of 1977 I penned a front-page story predicting the inflation rate through the end of 1978 would be around 6%. That was cause for thanks -- the rate had been 10% earlier in 1977 -- but also cause for worry, as it didn't seem likely to fall further.

Moreover, a government economist admitted to me that 6% inflation was "a fairly crummy redistribution of income" for people on fixed incomes and workers without bargaining power. There were worries, I wrote, that "inflation psychology" was developing, raising fears of high inflation becoming the norm.

By October 1978, with inflation running at 8% a year, I was writing stories about President Jimmy Carter's attempts to bring it down with voluntary "wage-price guidelines." The guidelines failed. Three months later, the inflation rate was 9%.

By 1980, I was finally making $25,000. By then, though, $25,000 was far from an upper-middle-class income. Inflation had ravaged its purchasing power.

In mid-1980 the Journal moved me to Tokyo, so I didn't get to tell the story of how Fed chair Paul Volcker tamed the inflationary beast in the early 1980s. He did it by raising interest rates to 20% and letting a severe recession wring the inflation out of the economy. Farmers who lived through the '80s remember that all too well.

Back in the present, we have a government pumping money into an already rebounding economy, which suggests the inflation rate is almost sure to rise. What's unclear is whether it will rise enough to give birth to inflationary psychology -- or even enough to force the Federal Reserve to raise interest rates.

Chair Jerome Powell keeps reassuring markets that the Fed plans to keep its benchmark rates near zero, even though it expects inflation to rise and unemployment to fall. At least some investors aren't convinced. They fear that despite Powell's protestations, the Fed will do what a Fed chief in the 1960s said was its job -- "take away the punch bowl just as the party gets going."

The markets' nervousness, expressed in a 10-year Treasury bond yield that's gone from 0.9% to around 1.7% in two-plus months, may be overdone. This isn't the 1970s; the pandemic has left the economy with a ton of slack. The unemployment rate is 6.2%. Before the pandemic, it was below 4% for a couple of years without kindling inflationary fires.

My reading is the Fed will keep its powder dry as long as the inflation rate is south of 3%, and we won't see 3% any time soon. Bond investors, who don't like any inflation because it means being repaid in devalued dollars, are right to be a little nervous -- emphasis on "little." Let's hope they don't get a lot nervous and force the Fed's hand.

Farmers and ranchers needn't be overly worried about inflation, though they might want to lock in financing with market rates moving higher.

Whether or not they worry about inflation, everyone should worry about inflation spinning out of control. For once it does, once inflationary psychology takes hold, the only cure is gut-wrenching economic pain. That's the lesson of the '70s.

For now, there's no sign of inflation coming anywhere near spinning out of control. Better to worry about more pressing possible problems.

Urban Lehner can be reached at urbanize@gmail.com

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