It is likely we are living in an extended period of price stability. This is good news. It boosts real disposable income and will eventually support private consumption. Inflation expectations are well anchored, and there is no evidence households and companies are delaying purchases because of negative expectations. Warnings about outright deflation and calls for ECB action are misguided and irresponsible. The longer this discussion continues, and the more intense it becomes, the more likely the risk of a self-fulfilling prophecy.
I emphasised the part, which apparently upset Wolfers most. As he goes on:
So, Stark begins by asserting that low inflation boosts real disposable income. That’s a zero-credit answer on any undergraduate exam: yes, low inflation makes income gains higher for any given rate of increase in nominal income, but low inflation reduces the rate of nominal income growth one for one. The notion that an influential former monetary official doesn’t understand this is breathtaking.
Well, who is right?
Stark assumes that nominal growth is given and real growth depends on inflation. Wolfers, on the other hand, believes real growth is given, while inflation changes the nominal growth one to one.
If Stark is right, inflation is wrong, because it robs people of their real income and savings. If Wolfers is right, inflation is relatively harmless, because it does not harm real income; it merely robs savers and bondholders, which is good, as it subsidises debtors who apparently deserve it.
Who is correct, anyway?
Jürgen Stark is right. Nominal income (wages and salaries) are usually fixed or sticky at best in most European countries. Low inflation is beneficiary for workers, while high inflation erodes their real income.
Look at the data from the United Kingdom, 1968-1988:
The data scream: HIGH INFLATION IS BAD! HIGH INFLATION IS BAD!
No, Wolfers, it's not one for one. You failed.