Inflation is not the danger in our current economic straits - thoughts on Fed Chairman Bernanke's press conference

I'm going to double-down on the inflation "issue" - it's a non-issue right now, except as a cover for a regressive economic agenda. Inflation is as low as it's been in years. And, despite global fluctuations in oil and food commodities prices, there are no signs that core inflation - which is the predictive norm for Federal Reserve monetary policies, as opposed to "events-driven" shifts in the markets most contingent on external factors and thus most subject to short-term spikes - will rise significantly.

Brad De Long, economics professor at UC Berkeley, offers a good explanation of the current and essentially timid Fed policy, as interpreted from Ben Bernanke's precedent-setting press conference. And De Long explains why he sees the Fed inflation target as overly restrictive and oblivious to the continuing high unemployment:

Chairman Ben

A few years ago former Federal Reserve governor Larry Meyer said: “If you have not noticed that the Federal Reserve is pursuing a 2 percent per year inflation target, you have not been paying attention.”

To me the most surprising thing about Chairman Bernanke’s press conference was his apparent abandonment of that 2 percent per year inflation target.

He stated that he was unwilling to undertake more stimulative policies because “it is not clear we can get substantial improvements in payrolls without some additional inflation risks.”

But the personal consumption expenditure deflator (excluding food and energy) has not seen a 2 percent er year growth rate since late 2008: over the past four quarters it has only grown at 0.9 percent. At a 3.5 percent real G.D.P. growth rate, unemployment is still likely to be at 8.4 percent at the end of 2011 and 8.0 percent at the end of 2012 — neither of those levels of unemployment would put any upward pressure at all on wage inflation.

It thus looks like 1 percent is the new 2 percent: with current Federal Reserve policy, we are looking forward to a likely 1 percent core inflation rate for at least another year, and more likely three. If the Federal Reserve were aiming for a 2 percent per year inflation rate, it would be aggressively employing stimulative policies right now. But that is not what the Fed is doing.

Would that we had a 2 percent per year inflation target — or even a 3 percent per year inflation target. In that case, recovery would be faster. Unemployment would be lower.

I see no signs anywhere in the marketplace that there is any threat at all of rising inflation expectations.

Paul Krugman further expresses disappointment with Bernanke HERE - with charts!

De Long Via New York Times "Room for Debate."