Higher Inflation, Lower Real Wages?
I see that the idea of targeting 4% inflation is picking up a little steam in the blogosphere--Karl Smith proposes, and Kevin Drum agrees:
In practice, the Fed doesn't target 2% inflation. If they did, it would sometimes be a bit below that and sometimes a bit above. In practice, they treat 2% as a ceiling, which leads to inflation that's lately been in the neighborhood of 1-2%. So why not adopt a target of 4%, but explicitly make it a ceiling? That would actually be easier to maintain (no more arguing about whether inflation has been above the target for "too long") and would probably produce actual inflation in the 3-4% range. The genie would stay in the bottle and monetary policy would have more bite.
The popularity of this idea with left-wing bloggers (I believe Matt Yglesias is also a fan) naturally makes me think of real wages. What would higher inflation mean for that median worker whose wages, we keep hearing, are stagnating so quickly?
One of the salutary effects of higher inflation is that it assists in speedy economic adjustment because it solves the problem of sticky wages: people will not easily accept reductions in their nominal standard of living, but if inflation outpaces their wage growth, they are effectively getting a pay cut.
If we think that broader trends in society are pushing down the returns to low-wage labor, while raising the incomes of a favored cognitive elite, then does higher inflation hasten that process? Or is it counterbalanced by the hit that fixed-income investors take, at least in the short term?
I don't know what the ultimate effect would be, but I'd be surprised if it were neutral.