Project Syndicate: Silent Inflation

Central banks manage inflation for stability, and Yale economics professor Robert Shiller describes the challenge of “silent inflation” – the practice of central banks setting inflation targets ranging from below or near 2 percent for Europe, the United States and Japan to 13 percent for Egypt. “Such policies cause a sort of magnification of the present in the minds of most people,” Shiller writes. “If one is not careful to remember the effects of inflation on all prices, it might seem that we are living in a magnificently successful new era…. But sometimes there is a bit of fakery in the record, especially when the record is described in nominal terms and we have steady inflation.” He notes that most major economic indicators are reported in real terms and not corrected for inflation. At lower rates, inflation may not attract public alarm, yet reduces values over the long term. For example, in the United States, today’s $1 million was worth less than $120,000 in 1960. Earning he equivalent of $25,000 from 1980 requires three times as much today. Such trends can make some debt alluring, Shiller explains, and he suggests that inflation’s eroding effect should be kept in mind when assessing values of homes, wages or retirement over the long term. – YaleGlobal