QotD: The uses of inflation

At a conference this weekend, talking (once again) about the gold standard, I was struck by the fact that the things economics writers take for granted often sound horrifying to ordinary people.

In this case, the trouble came when I said that it's a good thing that the Federal Reserve errs on the side of having a little bit of inflation, and that in fact inflation in small amounts is probably good for the economy. The reaction of the assorted nice, normal people I said this to was about what you'd expect: they looked as if I'd suggested recreationally vivisecting their cat.

And yet, this isn't really all that controversial. A little bit of inflation lubricates the problem of sticky wages and prices: which is to say, that prices and wages are quicker to adjust upward than downwards.

To liberals, this generally sounds great: once you get a wage gain, it's yours to keep! The problem is, in an economic downturn, or a sectoral slump, the cost of your keeping that wage gain is that oftentimes, someone else gets the lovely parting gift of a layoff.

Megan McArdle, "In praise of (a little) inflation", Asymmetrical Information, 2007-09-17