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The Inflation Conundrum

From the US and Brazil to Turkey and India, growing price pressures are leaving policymakers facing some difficult decisions. Unlike in many previous global inflationary episodes, what is remarkable this time is how different the cross-country experiences have been.

ITHACA – Until a few months ago, talk of inflation was little more than a murmur: dry data from the statistical office, reports tucked away in the newspaper, and an occasional commentary. Now the discussion is urgent and anxious, as news of rising price levels comes in from economies around the world, including Argentina, Brazil, Turkey, India, and, most important, the United States.

The surge in inflation in the US, the world’s largest economy, is causing the greatest concern because its spillover effects are invariably far-reaching. The trouble is that – in a debate bookended by Paul Krugman and Olivier Blanchard – no one fully understands what is happening. Krugman thinks the current inflationary pressure is a short-term episode triggered by supply-chain disruptions, while Blanchard sees it as the result of the large spending under President Joe Biden’s American Rescue Plan, and as a prelude to a longer battle.

Unlike Krugman, I believe that rising US inflation, currently at a 30-year high of 6.2%, is caused by this big spending package. But I also believe, contrary to Blanchard, that Biden’s policy intervention was right, and that higher inflation is a price worth paying for the benefits the rescue plan has brought, particularly to the most vulnerable Americans.

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