A Return of That ’70s Show?: Here’s an example of the way things used to be: In May 1981, the United Mine Workers signed a contract with coal mine operators locking in wage increases averaging 11 percent a year over the next three years. The union demanded such a large pay hike because it expected the double-digit inflation of the late 1970s to continue; the mine owners thought they could afford to meet the union’s demands because they expected big future increases in coal prices, which had risen 40 percent over the previous three years.... Workers and employers were, in effect, engaged in a game of leapfrog: workers would demand big wage increases to keep up with inflation, corporations would pass these higher wages on in prices, rising prices would lead to another round of wage demands, and so on. Once that sort of self-sustaining inflationary process gets under way, it’s very hard to stop... it took a very severe recession, the worst slump since the 1930s, to get rid of the inflationary legacy of the 1970s.
But as I said, this time around there’s no wage-price spiral in sight.... [C]onsumers are, for the first time in decades, telling pollsters that they expect a sharp rise in prices over the next year. Fair enough. But where are the unions demanding 11-percent-a-year wage increases? (Where are the unions, period?) Consumers are worried... but you have to search far and wide to find workers demanding compensation in the form of higher wages, let alone employers willing to accept those demands... wage growth actually seems to be slowing, thanks to the weakness of the job market.
And since there isn’t a wage-price spiral, we don’t need higher interest rates.... When the surge in commodity prices levels off... inflation will subside on its own.
Still, why not raise interest rates a bit, as extra insurance against inflation?... [T]he financial crisis, which seems to be in remission right now, could flare up again.... And even if the financial crisis doesn’t come back, higher rates would further weaken an already weak real economy... [that already] feels like a recession to most people.... The only thing we have to fear on that front is inflation fear itself, which could lead to policies that make a bad economic situation worse.