Trying to Get to the Definition of Inflation

Robert's Stochastic thoughts (via Mark Thoma):

Most people in the USA use "inflation" to refer to increased prices and assume that inflation does not cause increased nominal wages. They will not be surprised by the graph. That's what they imagine when they say inflation is a problem. Most US adults would not object of told "inflation reduces the amount of goods workers can buy with their salaries." They hate inflation (considering 10% inflation by far the biggest problem for the USA in the 70s) exactly because they assume that price increases don't cause wage increases even in the long run.

Evidently the idea is that lower inflation (and they ask economists how to achieve it) means higher real wages and the same employment. Then in a sick twist the older New Keynesians (Fischer, Taylor, Gordon) argue that central banks are tempted to cause surprise inflation, since lower real wages are clearly desirable.

Most people who fear the inflation monster under their beds don't fear a wage price spiral, they don't hope for a wage price spiral. They think higher inflation means lower real wages forever which are not compensated by any benefit such as higher employment ever.

The debate is schizoid because economists and not totally ignorant policy makers accept the public view that inflation is hugely costly (assuming complete nominal wage rigidity) and also assume that high inflation is persistent and hard to eliminate because they know how nominal wages really respond to inflation.

At the moment this is all irrelevant (as you note) since core inflation is low, wage inflation is low and a higher relative price of petroleum really does reduce US aggregate real income. But the current insanity is made more likely by the general inflation insanity. Basically policy makers know that high gasoline prices make people vote against incumbents and they demand that Bernanke save them from the effects of increased Chinese demand for petroleum.

There is a lot of truth there.  The 70's inflation was driven by Nixon dropping the gold standard, along with the oil embargo and decreasing oil production in the U.S. (Texas reaching peak production) driving down the dollar and driving up oil costs.  This combined with automatic cost-of-living wage increases tied to the consumer price index to kick in, starting a wage-price spiral.  Today we have the weaker dollar and the higher oil prices, but we don't have the wage increases.  What wage increases we do have go directly to helath insurance companies.  With high unemployment, workers don't have leverage to push for wage increases, and must make do by cutting back.  Employers have enough trouble passing on raw material costs, let alone labor cost increases.  Our main hope would be to reduce consumption of energy, and bring down that dead load cost on our economy, but that means getting off of our fat asses and walking, biking or using public transit, and since suburbal sprawl has made that tremendously difficult, I don't think we'll be seeing much voluntary decrease in energy usage.