This year, it looks like there will be friction over which priority of the Fed is most important right now. You’ll recall the U.S. Federal Reserve System is the only central bank in the world with a dual mandate — control both unemployment and inflation, which is more difficult than it sounds. Generally speaking, those policy moves to control inflation tend to increase unemployment, and those policy moves to reduce unemployment tend to increase inflation.
Janet Yellen is expected to stress the unemployment problem. Some of the regional Fed presidents are expected to stress inflation. I see it as a contest between good data and bad data.
It is clear that millions of people are still unemployed, but at 6.4%, we have already made a great deal of progress. However, the long-term unemployed present a special problem for policymakers, especially for monetary policymakers. Of course, there is lots of good data to document these problem, and this unemployment problem has dominated economic discussion for some years.
With respect to inflation, the data does not reflect any problem. In fact, the data suggests that deflation might be more of a problem, which is far more pernicious than inflation. Despite the data, a number of surveys have shown that consumers don’t believe this, as they see actual inflation in consumer prices. In fact, inflation does seem to be more apparent in consumer prices than in industrial prices. The popular new term being tossed about is “Shrinkflation” where consumers still pay the same price for a product, but that product is now slightly smaller. For example, paying $1.59 for a 10-oz candy bar is cheaper than paying $1.59 for an 8-oz candy bar.
I hope Yellen is successful on keeping the focus off inflation. Keep the focus on the unemployment problem, which is backed with good data, by attacking the bad, inconclusive data on inflation. A little inflation is good for debtors, and the United States is the world’s biggest debtor. There are always individual winners and losers with any economic policy, but the country-as-a-whole wins with a little inflation. Yes, breaking inflation later is more painful than breaking inflation before it takes hold, but that pain is less than the pain of not deflating our debt — by allowing a little inflation now.