The world’s major central banks continue to express concernabout inflationary spillover from their recession-fighting efforts. That is amistake. Weighed against the political, social, and economic risks of continuedslow growth after a once-in-a-century financial crisis, a sustained burst ofmoderate inflation is not something to worry about. On the contrary, in mostregions, it should be embraced.

Perhaps the case for moderateinflation (say, 4-6% annually) is not so compelling as it was at the outset ofthe crisis, when I first raisedthe issue. Back then, against a backdrop of government reluctance to force debt write-downs,along with massively over-valued real housing prices and excessive real wagesin some sectors, moderate inflation would have been extremely helpful.

The consensus at thetime, of course, was that a robust “V-shaped” recovery was around the corner,and it was foolish to embrace inflation heterodoxy. I thought otherwise, based on researchunderlying my 2009 book with Carmen M. Reinhart, This Time is Different. Examiningprevious deep financial crises, there was every reason to be concerned that theemployment decline would be catastrophically deep and the recoveryextraordinarily slow. A proper assessment of the medium-term risks would havehelped to justify my conclusion in December 2008 that “It will take every toolin the box to fix today’s once-in-a-century financial crisis.”

Five years on,public, private, and external debt are at record levels in many countries.There is still a need for huge relative wage adjustments between Europe’speriphery and its core. But the world’s major central banks seem not to havenoticed.

In the United States,the Federal Reserve has sent bond markets into a tizzy by signaling that quantitative easing (QE)might be coming to an end. The proposed exit seems to reflect a truce accord among the Fed’s hawks anddoves. The dovesgot massive liquidity, but, with the economy now strengthening, the hawks areinsisting on bringing QE to an end.

This is a modern-dayvariant of the classic prescription to start tightening before inflation setsin too deeply, even if employment has not fully recovered. As William McChesneyMartin, who served as Fed Chairman in the 1950’s and 1960’s, once quipped, thecentral bank’s job is “to take away the punch bowl just as the party getsgoing.”

The trouble is thatthis is no ordinary recession, and a lot people have not had any punch yet, letalone too much. Yes, there are legitimate technical concerns that QE isdistorting asset prices, but bursting bubbles simply are not the main risk now.Right now is the US’s best chance yet for a real, sustained recovery from thefinancial crisis. And it would be a catastrophe if the recovery were derailed by excessive devotion toanti-inflation shibboleths,much as some central banks were excessively devoted to the gold standard duringthe 1920’s and 1930’s.

Japan faces adifferent conundrum.Haruhiko Kuroda, the Bank of Japan’s new governor, has sent a clear signal tomarkets that the BOJ is targeting 2% annual inflation, after years of near-zeroprice growth.

But, with longer-terminterest rates now creeping up slightly, the BOJ seems to be pausing. What did Kuroda and his colleaguesexpect? If the BOJ were to succeed in raising inflation expectations, long-terminterest rates would necessarily have to reflect a correspondingly higherinflation premium. As long as nominal interest rates are rising because ofinflation expectations, the increase is part of the solution, not part of theproblem.

The BOJ would beright to worry, of course, if interest rates were rising because of a growingrisk premium, rather than because of higher inflation expectations. The riskpremium could rise, for example, if investors became uncertain about whetherKuroda would adhere to his commitment. The solution, as always with monetarypolicy, is a clear, consistent, and unambiguous communication strategy.

The European CentralBank is in a different place entirely. Because the ECB has already been usingits balance sheet to help bring down borrowing costs in the eurozone’speriphery, it has been cautious in its approach to monetary easing. But higherinflation would help to accelerate desperately needed adjustment in Europe’scommercial banks, where many loans remain on the books at far above marketvalue. It would also provide a backdrop against which wages in Germany couldrise without necessarily having to fall in the periphery.

Each of the world’smajor central banks can make plausible arguments for caution. And centralbankers are right to insist on structural reforms and credible plans forbalancing budgets in the long term. But, unfortunately, we are nowhere near thepoint at which policymakers should be getting cold feet about inflation risks. Theyshould be spiking the punch bowl more, not taking it away.