Economist Paul Krugman explains why it's not time to panic about inflation

Economist Paul Krugman explains why it's not time to panic about inflation
Paul Krugman // The Oxford Union via YouTube

MAGA Republicans are claiming that under President Joe Biden, inflation is bringing back painful memories of 1979, stagflation and the Jimmy Carter years — when prices were soaring. In 1979, the United States had an inflation rate of 11%, according to the Bureau of Labor Statistics. But according to liberal economist Paul Krugman, Biden's detractors are greatly exaggerating the inflationary difficulties the U.S. is facing in late 2021.

Krugman, in a recent New York Times column, stresses that while inflation is a certainly a concern, the inflation the U.S. is currently facing has more in common with the Harry Truman years than the Carter years.

"Back in July," Krugman explains, "the White House's Council of Economic Advisers posted a thoughtful article to its blog titled, 'Historical Parallels to Today's Inflationary Episode.' The article looked at six surges in inflation since World War II and argued persuasively that current events don't look anything like the 1970s. Instead, the closest parallel to 2021's inflation is the first of these surges, the price spike from 1946 to 1948."

Krugman continues, "Wednesday's consumer price report was ugly; inflation is running considerably hotter than many people, myself included, expected. But nothing about it contradicted CEA's analysis — on the contrary, the similarity to early post-War inflation looks stronger than ever. What we're experiencing now is a lot more like 1947 than like 1979."

1947 was two years after the end of World War II and two years into the presidency of Harry Truman, who had been vice president under President Franklin Delano Roosevelt and was sworn in as president following FDR's death in 1945. Truman woke up as vice president on April 12, 1945; he was sworn in as president when FDR died of a cerebral hemorrhage that day.

"Here's what you need to know about that 1946-48 inflation spike: It was a one-time event, not the start of a protracted wage-price spiral," Krugman notes. "And the biggest mistake policymakers made in response to that inflation surge was failing to appreciate its transitory nature: They were still fighting inflation even as inflation was ceasing to be a problem, and in so doing helped bring on the recession of 1948-49."

Krugman goes on to say that the consumer price report released on November 10 "looked very much like the classic story of inflation resulting from an overheated economy, in which too much money is chasing too few goods."

"Earlier this year," Krugman writes, "the rise in prices had a narrow base, being driven largely by food, energy, used cars and services like air travel that were rebounding from the pandemic. That's less true now: It looks as if demand is outstripping supply across much of the economy."

U.S. consumers, Krugman adds, have been "buying fewer services but more goods than before, putting a strain on ports, trucking, warehouses and more."

"On the plus side," Krugman observes, "jobs have rarely been this plentiful for those who want them."

One of the lessons of the Truman years, according to Krugman, is that the inflation of that period didn't last.

"That was an ugly inflation report (on November 10), and we hope that future reports will look better," Krugman argues. "But people making knee-jerk comparisons with the 1970s and screaming about stagflation are looking at the wrong history. When you look at the right history, it tells you not to panic."

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