Fear of inflation is overblown

Chris Farrell Nov 19, 2009

Fear of inflation is overblown

Chris Farrell Nov 19, 2009


Bill Radke: This week brought more evidence that for now, inflation is a tame beast. Both wholesale and consumer prices rose a little bit, but they’re still below where they were a year ago. And yet,
every time Federal Reserve chair Ben Bernanke speaks, as he did again this week, his listeners want to know when inflation will finally blow in. Marketplace’s economics correspondent Chris Farrell says it’s an overblown fear. Chris, Good morning.

Chris Farrell: Good morning.

Radke: Maybe we’re not hearing the footsteps yet, but isn’t the inflation zombie gonna get us?

Farrell: Most people on Wall Street seem to believe that. There’s this enormous fear, with the Fed keeping interest rates low and this giant fiscal budget deficit we have, that inflation looms. But you know, Bill, it reminds of the story of the boy who keeps snapping his fingers. Have you heard this one?

Radke: No, tell me.

Farrell: All right. So there’s a young boy, keeps snapping his fingers. His parents, they take him to the doctor, and the doctor says, “Why do you keep snapping your fingers?” And the boy says, “To keep the snakes away.” The doctor looks at him and says, “But there are no snakes here.” “Ah,” says the boy, “that’s because I keep snapping my fingers.”

Radke: So it’s a mirage.

Farrell: It’s a mirage. You keep hearing about inflation, inflation, inflation. So waht I do is I look at Treasury inflation-protected securities. This is debt sold by the U.S. government, and it’s a hedge against inflation. And when you look at tips — that’s what they’re called — what is the inflation rate that the tips market is predicting — 2 percent or so. That’s not runaway inflation, so I don’t see it.

Radke: What about those rising assets that seem like maybe warning signals? Commodities have been rising, and, you know, oil and grains.

Farrell: You know, Bill, you can always make a scenario that inflation is around the corner — and you’re absolutely right, the price of gold seems to be signaling some problems down the road, and we have the value of the dollar is lower. And that’s why Wall Street is obsessing about inflation. But I wanted to say something: we have an unemployment rate that’s over 10 percent. If you look at our broadest measure of unemployment, it’s at 17 percent. This does not make for an inflationary environment.

Radke: And of course, this is all about how much leeway the Fed has, and you’re telling those central bankers, you know, keep up the stimulating and the low rates?

Farrell: Keep up the stimulating, keep up the low rates. What do central bankers worry about? Inflation, inflation, inflation. It’s the unexpected thing we should worry about, not inflation. I don’t think it’s going to be a problem in a highly competitive global economy.

Radke: Marketplace’s economics correspondent, Chris Farrell. Thank you.

Farrell: Thanks a lot.

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