Friday, August 14, 2009

Fears of Inflation

Jack Healy reports on the current lack of inflation:

Consumer prices in the United States did not budge last month, easing, for now, concerns that the record deficit and huge new government spending would spur inflation. “It could be a very large long-run problem,” said Mickey Levy, Bank of America, chief economist. “But in the near-term, it’s not a problem at all.” The drift in prices suggests that enormous slack remains in the American economy, even as the recession bottoms out and some industries jump-start production. There are 14.5 million unemployed people in the United States, retail sales are sluggish, and many businesses and factories are still running at less than full capacity. The Labor Department reported on Friday that its consumer price index was unchanged from June on a seasonally adjusted basis, and that prices this summer were 2.1 percent lower than last July, when soaring oil costs drove gasoline prices to $4 a gallon and lifted the cost of food and other products.

One would not expect inflation given the enormous slack in this economy even with a significant fiscal stimulus which of course has yet to eliminate this slack. And why is Mickey Levy trying to tell us we have a very large long-run inflation problem? I just checked here for the Federal Reserve’s most recent reporting on nominal and real interest rates on 20-year government bonds. The former is 4.37% and the latter is 2.24%. So the market is expecting a long-term inflation rate around 2%. That’s a very large problem?


Andy Harless said...

I think Levy makes sense if you take his words literally: inflation "could be" a very large long-run problem...and so could deflation. The ultimate servicing of today's debt could be facilitated by inflation, but it could also be accomplished by running primary surpluses, which would tend to be deflationary. Either of these is a risk, and the bond market is sensitive to both.

mag jay said...

////And, that's nothing new...Greed is the word...of the day