Are inflation worries justified?

Amy Scott Jul 14, 2009

Are inflation worries justified?

Amy Scott Jul 14, 2009


KAI RYSSDAL: Inflation watchers — like, say, a guy named Ben Bernanke — got a poke in the ribs today from the Commerce Department. Wholesale prices jumped close to 2 percent last month, mostly thanks to rising energy prices.

Typically, though, inflation’s one of the few things you don’t have to worry about during a recession. Prices tend to go the other way in a down economy. And when you look back over the last year we have actually been paying a little less for most things. So why are people nervous about inflation?

Marketplace’s Amy Scott has that story.

AMY SCOTT: It’s not just inflation some people are talking about, but hyperinflation. Price increases of a hundred, a thousand…even a million percent a year or more. The word conjures images of Germans carting around wheelbarrows of cash in the 1920s.

To get a sense of what life might be like with those kinds of runaway prices, I spoke to Isaac Cohen. He’s an economist, formerly with the United Nations. He lived in Mexico in the 1980s, during a period of rampant inflation throughout Latin America.

ISAAC COHEN: Prices were being changed in the supermarkets in front of you every hour. So you would go to the supermarket, buy cooking oil for let’s say 50 pesos. And an hour later it would be 80 pesos, or 100 pesos. It would double, you know, in an hour.

Cohen says bills would almost disintegrate in your hand from overuse.

COHEN: You need to have a lot of cash in your pocket because what you want to do is you want to get rid of it as fast as possible. Go buy yourself a refrigerator, buy yourself a car, something durable, to compensate for the loss of value of the currency.

So is that what we’re in for? Are we all going to have to sink our money into major appliances?

I asked Andy Rosenfield over at Guggenheim Partners. He advises institutions and rich people on how to invest their money. He says some of those clients are very worried about inflation. Not that we should break out the wheelbarrows anytime soon. But Rosenfield says we could be in for a lot more than the 2 to 3 percent annual inflation we’re used to.

ANDY ROSENFIELD: It’s very likely that we could experience a material inflation in the United States. Perhaps 5, 10, even 12 percent rates of increase in price. That’s something we haven’t seen since the Carter administration in the United States.

Rosenfield says it’ll be a few years before higher prices start to bite. If they do, John Brynjolfsson will be poised to profit. He started the hedge fund Armored Wolf this year, in part to capitalize on what he sees as the coming wave of inflation.

Brynjolfsson says the Fed is pouring dollars into the economy to try to stave off a deeper recession. When too much money chases too few goods, prices rise.

JOHN BRYNJOLFSSON: The Fed and Ben Bernanke have the printing press, they have the ink, they have the paper, and therefore they control the value of money.

To stop prices from rising too high, too fast, they can slow or stop the printing press. But economist Barry Bosworth with the Brookings Institution says they shouldn’t do it too soon. He says all this talk of inflation is a distraction from the real problem. Close to 10 percent of eligible workers are unemployed.

BARRY BOSWORTH: In the Great Depression of the 1930’s we had this same sort of talk. So-called monetary experts warned about inflation, the central bank got worried and it literally tightened up our monetary policy in 1937 and caused a return to the Depression. The economy collapsed all over again. So we don’t want to act prematurely.

Bosworth says he’d actually welcome a little inflation — maybe 2 or 3 percent. It would be a sign that the economy has enough momentum to pull out of the recession. The art is knowing when to put the brakes on before inflation runs out of control.

In New York, I’m Amy Scott for Marketplace.

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