I Am Befuddled About Inflation

Prices aren’t rising fast enough in Japan:

Japan has virtually given up on reaching 2% inflation after nearly six years of trying. An argument gaining ground in Tokyo holds that the inflation goal, once seen as paramount, doesn’t matter so much after all.

Six years? How about 20 years? Here are the past two decades of inflation in Japan:

There’s a grand total of one year above 2 percent. What’s more, over the course of two decades Japan has only two years over 1 percent. By my back-of-the-envelope noodling, prices have risen a cumulative total of about 1 percent between 1998 and 2018. That compares to a cumulative increase of about 54 percent in the United States. Of course, you might wonder if anyone should even care about this when you compare economic growth in Japan vs. the US:

Total GDP in the US has grown faster than in Japan, but that’s because our population is increasing while theirs is declining. If you look at GDP per working-age adult, both countries are doing about the same. In fact, Japan is doing slightly better.

So who needs inflation? I keep wondering this for two reasons. First, the case for positive inflation is that it allows the central bank to set effectively negative interest rates during a recession, and this allows a faster recovery than a merely zero interest rate. But does it? Japan seems to have recovered from the Great Recession about as quickly as we did.

Second, it remains unclear to me how central banks can produce inflation on demand. In theory, they can produce any inflation rate they want, but in practice they seem to have very little control over it. They can lower the inflation rate by crashing the economy, but they don’t really seem to know how to increase it.

In other words, I remain befuddled. The conventional wisdom suggests that, if anything, the US should have an inflation target of 4 percent, not 2 percent. I’ve always accepted this. But how do we get there? And is there really much evidence that it would help us even if we did?

DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

We Recommend

Latest

Sign up for our newsletters

Subscribe and we'll send Mother Jones straight to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate