Does Bernanke Even Understand What Inflation Is?

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I have in front of me a copy of yesterday’s Palm Beach Post that includes an article by Neil Irwin entitled “Bernanke Holds First News Conference” (I couldn’t find a link, and I don’t want to spend all day looking for one. Sorry). Bernanke, who has been hailed as an expert on the Milton Friedman-style monetarist approach to the study of depressions, is quoted as saying that high gas prices “make economic developments less favorable” and “they add to inflation.” And, “[B]y draining purchasing power from households, they are also bad for the economy.”

The statement that high gas prices “add to inflation” is pure Keynesianism, not monetarism, and is an expression of the discredited Keynesian notion of “cost-push inflation.” As Friedman himself explained many years ago, when Bernanke was supposedly studying Friedman’s monetary theory, when people pay more for higher-priced gas, they then have less money with which to purchase other things. Therefore, there will be downward pressure on prices on those other markets. Prices go up in one market, and down in others. There is no general price inflation.

The classic monetarist definition of price inflation is a continuous and sustained increase in the PRICE LEVEL (i.e., the CPI) , not a single relative price like the price of gas. General price inflation requires central bank monetary inflation according to monetarist theory. Despite his boasts of being an expert in monetarist explanations of depressions, Bernanke apparently doesn’t even understand what inflation is. Either that, or now that he is the chief central monetary planner he understands that it is not in his personal self interest to even hint that the Fed might be culpable in creating price inflation.

Higher gas prices may well be a manifestation of general price inflation caused by the Bernanke Fed’s wild and irresponsible money creation in recent years. But even if not, there’s nothing inherently “wrong” with prices going up and down depending on supply-and-demand conditions. The alternative is government-imposed price controls, which have always had disastrous consequences. This of course is exactly the business Bernanke is in — attempting to fix one particular category of prices, namely, interest rates. As anyone who is familiar with the first two or three chapters of any principles of economics book can tell you: It won’t work.

1:17 pm on April 29, 2011