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How the Fed Is Bringing an Inflation Debate to a Boil

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Photographer: Stefani Reynolds/Bloomberg

There’s hardly any question that carries greater weight in economics right now, or divides the financial world more sharply, than whether inflation is on the way back. One camp is convinced that the no-expense-spared fight against Covid-19 has put developed economies on course for rising prices on a scale they haven’t seen in decades. The other one says the virus is exacerbating the conditions of the past dozen years or so -- when deflation, rather than overheating, has been the big threat. A decision by the U.S. Federal Reserve to allow inflation to run higher during economic recoveries is raising the stakes in the debate.

Governments and central banks may face pressure to curtail their pandemic relief efforts, already worth some $20 trillion according to Bank of America, if they trigger a spike in prices. Workers and consumers will see the impact in wage packets and household bills. More than $40 trillion of retirement savings is at risk of erosion if inflation returns. Inside the economics profession, there’s something else at stake too. Charles Goodhart –- a scholar at the London School of Economics who, at the age of 83, has seen a few orthodoxies rise and fall –- argued in a recent paper that what happens to inflation after the pandemic “will affect macroeconomic theory and teaching, perhaps forever.”