Don't Believe the Inflation Fear-Mongers

Economists and businesspeople are warning of a massive spike in U.S. inflation. The fear may be overblown.

One thing undeniably in abundance in the United States is a fear of inflation.

And with food and energy prices on the rise, American consumers do not seem to trust U.S. central bankers‘ inflation forecasts very much. A March 2011 Conference Board survey showed that consumers expect inflation to rise to a whopping 6.7 per cent despite the official Federal Reserve view that inflation will rise only modestly over the next year.

Yet the bankers are probably right – a closer look at the data reveals that inflation is not likely to run away anytime soon, and that the pinch consumers are feeling is really a function of a temporary spike in commodity prices.

In a recent speech, Federal Reserve chairman Ben Bernanke said, “I think the increase will be transitory, that it will pass, and we will go back to a level of inflation that is consistent with our price stability mandate.”

The reality is that when you look at the core inflation rate, which excludes volatile food and energy costs, consumer prices are not all that high. According to Federal Reserve measures, as of February the core inflation had risen just 0.9 per cent over the previous 12 months. This is certainly not something to write home about.

Nor are prices likely to rise across the board anytime soon. With unemployment at 8.8 per cent, and with weak wage growth, it is unlikely that there will be the uptick in overall consumer spending necessary to push prices higher.

These facts matter because the people who obsess over runaway inflation call for the Federal Reserve to raise interest rates – a standard monetary-policy move used to fight inflation.

A hike in interest rates now could prove detrimental to the nascent economic recovery currently taking place in the United States.

Increased rates would make it costlier for companies to borrow to expand their businesses and hire new employees; would make it more expensive for families to finance the purchase of a home; and would dampen overall demand for the goods and services produced in the economy. Quite simply, a rate hike is not a good idea.

American consumers might feel like everything costs a whole lot more these days. To be fair, they are paying more at the grocery store and at the gas tank.

However, the truth is that prices are not significantly higher throughout the economy, and it doesn’t seem like much is going to change in the near future.

Photo courtesy of Reuters.