When will analysts cease believing that higher inflation stimulates growth?

It is an old saw among ill-trained economic analysts that inflation aids growth. An oft-repeated corrolary flows from this mistaken idea: that being “anti-inflation” is the same as being “anti-growth.” Well-trained macroeconomists, following a path blazed by Edmund Phelps and Milton Friedman (among others), ceased saying long ago that higher inflation speeds growth. Rising inflation most-often is well-advertised and, hence, well-anticipated. When the higher inflation is fully anticipated, and when contracts and institutions have incorporated mechanisms to adjust, then the higher inflation lacks, itself, a mechanism to stimulate growth. Indeed, in the current economy, higher inflation has been anticipated for so long that it seems like waiting for Godot — or perhaps The Great Pumpkin.

The most recent restatement of the false argument that higher inflation stimulates growth came yesterday, by Binyamin Appelbaum in the New York Times. Writing on page B2, he says: “Rising prices can help stimulate the economy, making it easier for companies to increase profits and for borrowers to repay debts. Inflation also encourages people and businesses to borrow more money and to spend it more quickly. Low inflation reduces those incentives.”

Such nonsense.  A NYT reporter should know better — and so should its editors.

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