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Friday April 13th 2012

Why I am not very worried about inflation just now

Click on graphic to enlarge.

Several people have asked me in recent days if the Fed’s aggressive attempts to get the economy going will lead to galloping inflation to go along with our weak economic growth.  It is possible that this might occur down the road, of course, but I don’t see it happening just now.  The slack labor market has kept growth in nominal wages low, and labor represents a large fraction of a typical firm’s costs.  A persistent inflation problem is unlikely to develop until labor costs start rising significantly.  Notice in the graph above that the period of stagflation during the 1970s is well apparent in the nominal wage data.  The same thing is not happening now.  This is one reason I think the Fed is on the right track worrying more about the weak economy than about inflationary threats.

This article was originally posted on Greg Mankiw’s Blog