Gingham says: If inflation is indeed to start translating into wage and price pressures then the economy will have to quit shedding jobs, something it isn't in any hurry to do. It's hard to ask for higher wages when you're out of work, and it's hard to increase prices for the things you are trying to sell when your customers are out of work.

LeRoy: Sounds reasonable, and this indeed was the conventional view in economics for a long time. In the 1950s and 1960s almost everyone thought that there was an inverse relationship between wage inflation and unemployment, and for precisely the reasons you state. The graphical depiction of that relationship was known as the Phillips Curve. But then came the 1970s. And stagflation. When prices (or inflation) and unemployment were rising at the same time. That shocked a lot of people back in the 1970s. Some had even said that such a combination was impossible.

Obviously not. What happened in the 1970s was that the entire Phillips Curve shifted to the right, making the trade-off between unemployment and inflation much more unpleasant. And what caused this was an embedded rise in the amount of inflation that people expected. Which was, in turn, caused by the very loose monetary policy of most of the 1970s, and by some other macroeconomic policy blunders as well.

We are playing with fire here, making the same mistakes as we made back in the late 1960s and for most of the 1970s. Stagflation is rearing its ugly head again. The most serious inflationary pressures are being felt in energy and food. [Obvious, no?] Well, even unemployed people have to buy food...and they may have to buy gas, if only to get around to look for a job. [I went through that myself, back in 2000, when fortunately for me, gas was very cheap.] In other words, you can have rapid inflation in food and energy prices, in particular, even when unemployment is rising, because the demand for these products is so inelastic.

That is why the Fed's reliance on the so-called 'core inflation' rate is so objectionable. As one person remarked, core inflation is inflation with all the inflation stripped out.

Gingham again: The underlying and probably rather malignent weakness of the U.S. economy will continue to undermine the value of the dollar and keep imports expensive no matter what the Fed does, they are in a position of having to swim upstream here.

LeRoy: One of the major causes of the 'malignant weakness' of the U.S. economy is our weak dollar policy, maintained by very low interest rates (especially compared to Europe, where they evidently take inflation more seriously). Another major cause is the almost complete lack of an incentive to save, caused again by our interest rates being lower than the rate of inflation, meaning a negative real interest rate. Both of these are things that can only be corrected by higher interest rates. It would be a better analogy to say that right now, the Fed is swimming downstream, with its easy money policy, not recognizing that there is a very dangerous waterfall right up ahead.

They'd better start swimming upstream, right away, just as hard as they can.