That’s why central banks have gone to extraordinary lengths in the past decade to banish the specter of deflation. They’ve succeeded. Indeed, stock markets have been rattled by evidence that inflation is stirring in the United States, which might prompt the Federal Reserve to raise interest rates more rapidly than previously thought.
(On Wednesday, the U.S. government reported that consumer prices rose by 0.5 percent in January, more than expected. “Core” prices excluding volatile food and energy costs marked the biggest monthly gain in a year.)
But the chances of inflation getting out of control are small.
First, companies operate globally, so if manufacturing costs rise too high in the United States, they will shift production to cheaper locations overseas.
Second, there is still slack in the U.S. jobs market because many people who gave up looking for work after the crisis could be lured back into employment, capping wages.
Third, there is no reason to believe the Fed — or financial markets for that matter — would allow the money supply to spiral out of control.
The United States is no Venezuela.
Prices rise and fall all the time in response to factors such as changing consumer tastes and technological innovation. Medical care costs a lot more than in the past, computers a lot less. But a generalized rise in prices across the economy — which is the definition of inflation — is possible only if a country’s central bank prints too much money.
That’s what’s happened in Venezuela, where the money supply has increased by 4,000 percent in the past two years. The result is hyperinflation, forecast by the International Monetary Fund to reach 13,000 percent this year. Goldilocks’s oatmeal is nearly doubling in price every month. Poverty is rife because wages lag price rises. The economy is on its knees.
The United States is no Venezuela. Evidence of a pick-up in wages is good news in fact, considering that workers have been taking home less and less of the economic pie in recent years, while the suppliers of capital have benefited handsomely.
It’s possible that the recently enacted package of U.S. tax cuts and spending increases will cause the economy to run a bit too hot, pushing up prices a bit. But of the many problems facing the U.S. economy, runaway inflation is not one of them.
In 1981, then Fed Chairman Paul Volcker had to raise short-term U.S. interest rates to 20 percent to crush inflation. History will not need to repeat itself.
Questions to consider:
1. What “ripple effect” could a rise in consumer prices cause?
2. How can inflation be good?
3. When prices go up significantly, what might you or your family not buy?