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Economics

Higher Inflation: Scourge or Savior?

Central banks ponder benefits of higher prices

With consumer prices up 3.8 percent in the 12 months through August, you might think the Federal Reserve’s rate-setting committee would be taking stern action to lower inflation. Far from it. On Sept. 21 the Federal Open Market Committee announced it would make monetary policy even looser through what economists have dubbed “Operation Twist”—switching $400 billion worth of its Treasury holdings from short-term securities into long-term ones in a bid to bring down long-term interest rates.

High inflation isn’t the main risk, the rate setters said; weak growth is. The FOMC statement said the committee anticipates that inflation will wind up at or below its target range rather than above it in coming quarters “as the effects of past energy and other commodity price increases dissipate further.” The Fed’s implicit inflation target is 1.7 percent to 2 percent.