Inflation Fears Prove To Be Inflated

Posted by: Joe Weber on June 17

deflated_balloon.jpg Despite worries that efforts by Washington and the Federal Reserve to stimulate the economy will bring inflation roaring back, it will not be a top priority for Fed policymakers until a “convincing economic recovery” is in place, economists at Northern Trust argue. So far, they suggest, we’re not there.

Restrained inflation figures, reported by the government, suggest government policymakers have little to fret about on the price front, Northern Trust economist Asha G. Bangalore says in a June 17 analysis. The government report, which helped to temporarily push up Treasury bond prices, makes it less likely that the Fed will want to hike its main lending rate above the zero to 0.25% range.

“A convincing economic recovery and strong expectations of a growing economy are necessary for the Fed to consider suitable actions to prevent inflation,” Bangalore writes. “At present time, the enormous slack in the economy supports expectations of subdued inflation data, which is what we see at the moment.”

While the Consumer Price Index rose 0.3% in May, it has fallen some 1.3% over the last 12 months, the Bureau of Labor Statistics reported. The bureau noted that this is the largest slide since April 1950 and is due mainly to a 27.3% decline in energy prices, even including a 0.2% rise in energy costs in May.

The prices of some goods and services have clearly risen, though only modestly. Even while energy prices are down for the last year, gasoline prices did rise 3.1% in May, used cars cost 1% more overall, new cars climbed 0.5% and medical care gained 0.3%. But apparel and food got slightly cheaper, each dropping 0.2%. Food prices marked their fourth monthly decline in May.

The good news on the inflation front temporarily drove up Treasury bond prices, particularly in longer-term bonds. But prices retreated as concerns about more government involvement in the financial system arose. Longer-term bonds had been under pressure as investors feared inflation over time would eat away at their gains.


Reader Comments

Jeff Head

June 24, 2009 11:35 AM

Ann: I am seeing lots of articles saying inflation fears are overdone at the moment. I think we need to watch how things unfold but I don't believe the recovery is strong enough at the moment to erode our acct. Let's just monitor closely for a while this summer. Love, JAH

Joe Weber

June 24, 2009 11:43 AM

Jeff,
Thanks for your comment. Inflation, indeed, can affect us all quite personally. For now, at least, it seems a remote issue.
JW

Thank you for your interest. This blog is no longer active.

 

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BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.

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