Prepare for Inflation

Paul Krugman provides Dr. Janet Yellen with an endorsement to be our next head of the Federal Reserve. If selected and confirmed, I predict that she will attempt to introduce 4% annual inflation as a “Goldilocks” means of reducing our deficit while seeking to reduce stubborn unemployment. For the empiricists who read the RBC, keep an eye on the price of gold and on TIPS bonds. These market prices will provide clues about fears concerning anticipated future U.S inflation. It is true that international investors have to “pick their poison” concerning their asset allocation. U.S Treasury Bills may continue to be a more attractive investment than international alternatives.

Who loses from 4% inflation? Cash holders, U.S bond holders, and anyone else (including UC faculty!) whose nominal salary (or pension payments) isn’t indexed to the CPI! The senior faculty at public research universities will be incentivized to seek out outside offers to keep their real income constant! Our private sector peers regularly receive cost of living adjustments.

[Cross-posted at The Reality-based Community]

Matthew Kahn

Matthew Kahn is a professor at the University of California, Los Angeles's Institute of the Environment. He specializes in the environmental consequences of urban growth and related quality-of-life issues.