The Fed argues that inflation will decline as the economy slows down. But the economy has already been slowing, and inflation has continued to increase. The price of commodities took a step downward only after the Fed didn't cut rates as much as expected last week, and two members of the Fed's Open Market Committee, worried about inflation, balked at even that cut. The Fed is going to have to stop cutting rates, even if Wall Street and Washington politicians yelp in protest.
As David Frum of the American Enterprise Institute has pointed out, we've been here before. In the early 1970s, prices were rising, but the Fed cut interest rates anyway to address corporate woes. We avoided a sharp recession in the short term, only to get a deep recession later in the decade -- coupled with runaway inflation. The age of "stagflation" was upon us. Inflation was wrung out of the system only when the Fed kept rates high during the double-dip recession of the early 1980s.
We're unlikely to experience anything like the double-digit inflation of the 1970s. Among other things, workers don't have the kind of automatic cost-of-living increases that sent wages and prices in an ever-upward spiral back then. But the Fed shouldn't abandon price stability in the cause of an hour-by-hour attempt to avoid the inevitable distress of working through the excesses of recent years.
The market is a savage taskmaster. It's pay me now, or pay me more later -- when inflation would make it all the more painful.