WASHINGTON — Inflation is widely reviled as a kind of tax on modern life, but as Federal Reserve policymakers prepare to meet this week, there is growing concern inside and outside the Fed that inflation is not rising fast enough.
Some economists say more inflation is just what the American economy needs to escape from a half-decade of sluggish growth and high unemployment.
The Fed has worked for decades to suppress inflation, but many economists, including Janet Yellen, President Obama’s nominee to lead the Fed starting next year, have long argued that a little inflation is particularly valuable when the economy is weak. Rising prices help companies increase profits; rising wages help borrowers repay debts. Inflation also encourages people and businesses to borrow money and spend it more quickly.
Retailers including Costco and Wal-Mart are hoping for higher inflation to increase profits. The federal government expects inflation to ease the burden of its debts. Yet by one measure, inflation rose at an annual pace of 1.2 percent in August, just above the lowest pace on record.
“Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about,” Kenneth S. Rogoff, a Harvard economist, wrote recently. “It should be embraced.”
The Fed, in a break from its historic focus on suppressing inflation, has tried since the financial crisis to keep prices rising about 2 percent a year. Some Fed officials cite the slower pace of inflation as a reason, alongside reducing unemployment, to continue the central bank’s stimulus campaign.
Critics, including Rogoff, say the Fed is being much too meek. He says inflation should be pushed as high as 6 percent a year for a few years, a rate not seen since the early 1980s. And he compared the Fed’s caution with not swinging hard enough at a golf ball in a sand trap.
“You need to hit it more firmly to get it up onto the grass,” he said. “As long as you’re in the sand trap, tapping it around is not enough.”
All this talk has prompted dismay among economists who see little benefit in inflation, and who warn that the Fed could lose control of prices as the economy recovers.
As inflation accelerates, economists agree that any benefits can be quickly outstripped by the disruptive consequences of people rushing to spend money as soon as possible. Rising inflation also punishes people living on fixed incomes, and it discourages lending and long-term investments, imposing an enduring restraint on economic growth even if the inflation subsides.
Many households also have reason to miss higher inflation. Historically, higher prices have led to higher wages, allowing borrowers to repay fixed debts like mortgage loans more easily. At the current pace, prices would rise 6 percent over the next five years.