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A fighting hope against inflation
Economics editor Chris Farrell
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TEXT OF INTERVIEW
Scott Jagow: Federal Reserve Chairman Ben Bernanke had this to say week: The economy's probably not headed for a severe downturn, and inflation is the Fed's number one concern. And when I say inflation, I don't mean gas and food prices. Inflation is an overall increase in prices -- when a dollar doesn't buy as much anymore.
With that in mind, time to visit with our economics correspondent, Chris Farrell. Everybody's worried about inflation coming -- except you. Why not, Chris?
Chris Farrell: Well, here's why I don't think we're going to see inflation: What is happening to people's budgets right now? Four dollar a gallon gasoline, higher food costs. You take those things out of retail sales, guess what? Retail sales are weak. People are spending less -- they don't have the money. The money they have is being absorbed by higher food and energy costs. It's a weak economy -- you're not going to get a surge in inflation in the kind of weak economy that we have right now.
Jagow: So then why is the Fed talking about the dollar, and President Bush talking about the dollar and inflation?
Farrell: Well, what they're doing actually is one of the reasons I'm very optimistic about inflation. We all are seeing the high price of oil, the high price of gasoline, the high price of food. There is a concern, and so what the Fed is doing is it's talking a tough game. Maybe it raises its rate, maybe it doesn't. But tell me that inflation's going to take off when central bankers around the world are united in their concern about inflation? It's almost a self-defeating forecast: They're worried about it, they're going to act against it, therefore we're not going to get it.
Jagow: Chris, you also mentioned to me about the bond market, and that you can watch that to look for signs of inflation or how investors are treating inflation. What is that telling us right now?
Farrell: What inflation? One way of measuring the market's anticipation of inflation rate is to take a look at the 10-year Treasury yield, and then you look at the yield on Treasury inflation-protected securities. And the difference between those two is what the market is anticipating the inflation rate will be over 10 years. Market's anticipating 6 percent? No -- 5 percent? No. Turns out, market's anticipating 2.5 percent. That's essentially the rate the market's been anticipating for about the past three years. And investors are saying yeah, we might have a little bit of higher prices right now, but the Fed is acting and inflation is just simply not a big deal.
Jagow: Well Chris, you made a very good argument. Although, wow, when you go to the gas station and the grocery store, it doesn't make you feel any better.
Farrell: No, it doesn't. It makes you feel a lot poorer.
Jagow: All right, Chris Farrell, our economics correspondent. Thanks.
Farrell: Thanks a lot.
So! What you are saying is that inflation is like a young Michale Jordan ready to go up for a big slam dunk, but he steps into deflation quicksand, and the harder he tries to jump, the faster he sinks into quicksand of deflation. Why am I not comforted! The only reason people are turning to Treasury bonds is because it's the only investment around where you aren't likely to loose your shirt!
Wow. That was sure a rosy little piece. I love good news, but Mr. Farrell's optimism is founded on what magical principles of economics?
In my industry, the price of steel and other metals has shot up significantly and we can barely pay our employees enough to keep up with their added expenses.
With the government runup in debt and their printing of money (effectively) to pay for overextending, how can we not have significant inflation?
Mr.Farrell's trust in governments and bankers may be sorely misplaced.
I don't understand how Chris Farrell feels that inflation in food and energy in a weak econic environment is a good thing. The Fed's monetary policy is driving inflation by increasing the money supply at an insane rate. It is so bad that they won't even publish the M3 numbers anymore. The reason the 10 year Treasury yield is so low is there is a flight to quality which is driving up prices which move in the opposite direction of yields.
