The Great Moderation: Where was the Inflation?
Robert Higgs in “Monetary Policy and Heightened Price Volatility in Raw Materials Markets” provides a very good companion piece to Mark Thornton’s “Where Is the Inflation?”
As anyone who ponders the movements of the PPI from the late 1940s to the present can see, things are currently far from placid on the price front. In the markets for raw materials, the past decade has been the exact opposite of a “great moderation,” and these wild swings have occasioned tremendous difficulties and required wrenching adjustments by many different kinds of producers. Yet scarcely have they made one adjustment when another one cries out for their attention. Such a violently variable, impossible-to-forecast price environment has necessarily brought about a greater volume of business mistakes and a heightened reluctance to embark on new enterprises and to make new long-term investments in existing firms. For such paralyzing uncertainty, we have policy makers at the Fed and in the federal government to thank.
While policy during the great moderation did not lead to, at least by Fed standards, significant increases in core inflation, it did prevent or retard what should have been benign productivity driven declines in prices, and set the stage for back to back boom-bust cycles (Garrison (2009).
Current policy, while not currently generating significant changes in officially measure inflation, has retarded recovery in several significant ways. As noted by Higgs above, the current mondustrtrial policy, has increased policy uncertainty, which is slightly less comprehensive than Higgs’s regime uncertainty, but as argued extensively by John B. Taylor’s is a significant source of slow recovery. From an Austrian prospective, the policy has also significantly retarded the necessary deleveraging and it is possible that the Fed commitment to a 2% measured inflation target has impeded necessary wage and price adjustments.