Understading Inflation
21 June 2007
Editor, The Wall Street Journal
200 Liberty Street
New York, NY 10281
To the Editor:
You report that "Fed policy makers are likely to continue to highlight risks that low unemployment could push inflation higher" ("What's News," June 21).
I hope that the Fed's understanding of inflation is deeper than you portray it. Inflation is caused by too much money chasing too few goods. So because lower rates of unemployment generally mean higher output of goods and services, low unemployment puts downward, not upward, pressure on nominal prices. As the late Milton Friedman taught, the Fed can avoid inflation simply by keeping the money supply from growing faster than the growth of output.
Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Editor, The Wall Street Journal
200 Liberty Street
New York, NY 10281
To the Editor:
You report that "Fed policy makers are likely to continue to highlight risks that low unemployment could push inflation higher" ("What's News," June 21).
I hope that the Fed's understanding of inflation is deeper than you portray it. Inflation is caused by too much money chasing too few goods. So because lower rates of unemployment generally mean higher output of goods and services, low unemployment puts downward, not upward, pressure on nominal prices. As the late Milton Friedman taught, the Fed can avoid inflation simply by keeping the money supply from growing faster than the growth of output.
Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Posted by Don Boudreaux on
Tuesday January 29, 2008 at 2:54pm