(Bloomberg Opinion) -- In light of the expectation that Jerome Powell and the Federal Reserve System will announce a new stance toward inflation this week, it is worth reviewing what we have learned during the Covid-19 pandemic. The lessons are unsettling for the broader economic picture, but also indicate that Powell and the Fed are on the correct track.
The most obvious effect of the pandemic is often better understood by the public than by professional economists: It has been an inflationary time, but not in the traditional manner.
The measured numbers indicate deflationary pressures, but that is misleading. In times of crisis, any measured inflation rate becomes much less meaningful as an economic indicator.
Let’s take education, which many American students have been doing online or not receiving much of at all. Whether for K-12 or at the university level, the cost of getting a quality education this year has risen drastically (think private tutors) — and for many individuals it may be impossible altogether. We are seeing deteriorating quality, and thus much higher real prices, yet this does not show up as either a quality adjustment or a price increase in standard calculations.
Or consider health care. For months, Americans were afraid to visit hospital facilities, for fear of contracting Covid-19. The perceived cost of the hospital visit was thus much higher, in terms of anxiety and medical risk, even if the sticker price or reimbursement rate for heart surgery hasn’t budged.
In many parts of the country, the lines at the motor vehicle offices are much longer, or it is much more time-consuming to get your car inspected for state approval. That is mostly due to pent-up demand from the worst months of the pandemic. It may be nobody’s fault, but the quality of many government services is much lower than before.
Education, health care and government are pretty big parts of our economy. If you add on the lower quality of restaurant visits, reduced sports performances (your ESPN cable package is worth less), and an inability to take preferred vacations and trips, you have many more negative quality adjustments that don’t show up in measured rates of inflation.
The Bureau of Labor Statistics, the Bureau of Economic Analysis, the Fed and other institutions have declined to make formal adjustments for these changes in the real standard of living. That is the politically practical way to proceed, if not the technically correct decision.
Inflation measures work best when the consumption bundle is roughly stable over short periods of time, and that just hasn’t been the case this year. Because so many government payments depends on rates of indexation, debating “the true degree of inflation” this year would become an unending political football, with all the major institutions involved, including the Fed, losing credibility. (Just exactly how much worse is that Zoom lecture?) Besides, implicit price inflation from restricted opportunities probably should, for purposes of policy and benefits indexation, be treated differently than price inflation resulting from more expensive food and rent.
This all has significant implications for the monetary policy of the Fed looking forward.
Perhaps most important, price rules and other forms of inflation rules don’t really work in times of pandemic. The very measurement of price inflation becomes arbitrary, and dependent on inertial measurement conventions from normal times, so the numbers don’t have enough actual economic meaning to guide policy.
Furthermore, inflation rules are geared to limit the Fed’s ability to accelerate the rate of price increase beyond an acceptable level, as it did in the 1970s. They are less well-designed to handle price increases from real shocks such as pandemics, wars or other emergencies.
Emergency situations typically call for greater discretion, and thus Congress, the president, and the broader political and media establishment should grant the Fed greater flexibility in not always meeting its price inflation target. Fortunately, according to early reports, that is exactly what the Fed will be requesting.
Even if you favor inflation rate targeting more generally, it is not well designed for various emergencies, including our current situation. Similarly, price inflation during World War II was much higher than normal for the time, and implicit price inflation (Spam instead of T-bone steak) meant that true, quality-adjusted inflation in those times was higher yet.
Even if you are an optimist on the vaccine and biomedical fronts for fighting the novel coronavirus, a true V-shaped recovery would be a volatile, topsy-turvy event of its own, with a possible burst of credit growth and measured price inflation. In other words, the emergency will at some point end but highly unusual economic conditions will persist. Do we really think we know the correct rule for handling that situation?
No matter the exact course of the pandemic, Fed discretion has already taken a significant leap upward, and we are now about to recognize and affirm that fact for the better.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "Big Business: A Love Letter to an American Anti-Hero."
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