Knowledge and Skepticism

Getting Real about “inflation”

In their introduction to the conference volume Knowledge and Skepticism, its editors wrote that there are two main questions worth asking in epistemology.  What is knowledge? And, do we have any of it?  Their formulation has often come to mind these days in connection with Russia’s invasion of Ukraine, but it has also welled-up in my thinking in connection with a very different matter, the phenomenon of inflation.

Charles Goodhart is a central banker’s expert on central banking.  Having completed his PhD at Harvard University in 1963, he worked for seventeen years as an adviser to the Bann of England on domestic monetary policy, during the tumultuous but ultimately successful battles in Britain and the United States against global inflation, all the while pursuing a thorough examination of the rationale for bank regulation in the first place.

In The Evolution of Central Banking (1988), he traced the history of the most important and least understood regulatory institution of modern government, and for the next thirty years remained in the forefront of the discussion of supervision of the world banking system.

Then, in 2020, with Manoj Pradhan, the 84-year-oldGoodhart published The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival, arguing that that, owing to declining fertility rates in China and the West, the coronavirus pandemic has marked a watershed between the deflationary forces of the last thirty or forty years and a coming twenty years or so of rising prices.  A headline of a recent story on the front page of The Wall Street Journal conveyed the story:

Will Inflation Stay High for Decades? One Influential Economist Says Yes

Charles Goodhart sees an era of inexpensive labor giving way to years of worker shortages—and higher prices. Central bankers around the world are listening.

Goodhart predicts that inflation in advanced economies will settle at 3 percent to 4 percent around the end of 2022 and remain at that level for decades, wrote WSJ reporter Tom Fairless, as opposed to about 1.5 percent in the decade before the pandemic, with interest rates correspondingly higher. The Black Death, a fourteenth century pandemic had triggered a similar quarter-century of soaring wages and rising prices, he observed. You can read Fairless’s story yourself, thanks to this free link.

The question is, if Goodhart is right, what should central bankers do about it? Ever since het first presented his findings to a meeting of central bankers in 2016, monetary policy specialists representing various interests and points of view have been arguing about it.