One of the most persistent criticisms of Obama and the economic policies followed during his term as president is that they would inevitably lead to high inflation, or indeed hyperinflation according to some. The argument was that high deficits, driven by high government spending (even though government spending has in fact been coming down, see my previous blog postings here and here), plus the aggressive actions taken by the Fed to help the economy recover from the 2008 collapse, were boosting government debt and the money supply, and this would inevitably lead to soaring inflation.
The arguments have been made not only by conservative politicians and political pundits (see here and here for examples), but also by conservative economists such as John Taylor and Michael Boskin, both full professors at Stanford, who served in high positions in the administrations of Bush, Jr. and Bush, Sr. (respectively), and who also both served as senior advisors to Mitt Romney during his recent presidential campaign. For examples of some of their non-academic writings on the issue (some co-authored with Congressman Paul Ryan), see here, here, here, and here. John Taylor has indeed like to joke that the US is heading down the hyperinflationary path of Zimbabwe, and carries around a hundred trillion Zimbabwe dollar note in his wallet (as does Paul Ryan) to show people what may soon happen to the US. And the forecasts that Obama’s policies will lead to soaring inflation continue.
The forecasts were that soaring inflation would soon be upon us. But nothing could be further from the truth. We now have data for the full four years of Obama’s first term, and can compare inflation during this period to that of other presidents. The graph above shows that average inflation over the four years of Obama’s presidency was the lowest of any presidential term going back a half century to the 1961-64 term of Kennedy/Johnson. It was substantially lower than inflation during Bush’s two terms, was also somewhat below inflation during Clinton’s two terms (when inflation was less than during Bush), and so on back to Kennedy/Johnson.
The inflation measure graphed above is the GDP price deflator. This is the most broad-based measure of inflation for the economy as all goods or services produced or used in the economy are covered, weighted by the value of what was used. One could alternatively have used the price deflator from the GDP accounts for just the personal consumption component of GDP, but the results would have been the same: inflation by this measure was less under Obama than under any presidency going back to Kennedy/Johnson. And similarly, one could also have used the consumer price index, the common measure of inflation of goods and services used by households, and again have found the same results.
Inflation during Obama’s first term averaged 1.5% a year (as measured by the price deflator for GDP, and also 1.5% a year as measured by the deflator for the personal consumption component of GDP). Will it stay so low? Hopefully not. The Fed indeed now targets inflation to be about 2% a year, so average inflation during Obama’s first term has been below that target (although close to it in 2011 and 2012: see the graph above). With the economy still weak, some analysts have indeed argued that moderately higher inflation of perhaps 4 or 5% a year would help the economy to recover more quickly. Prominent proponents of such a higher target include Professor Paul Krugman (see here and here) and Olivier Blanchard, the chief economist of the IMF (see here).
Inflation can thus be expected to rise above what it has been, and indeed there would be benefits were it to rise to a still modest level such as 4 or 5% for a period. But inflation over Obama’s presidency up to now has been exceptionally low, and the forecasts by the conservative politicians, pundits, and even some economists that Obama’s policies would quickly lead to soaring inflation could not have been more wrong.