Prolonged Inflation Not in the Cards
Michael Dueker, chief economist of Russell Investments, believes the Fed can rein in the money supply before inflation has a chance to take off.
By Michael Dueker
Too much money chasing too few goods is the classic recipe for inflation. And one ingredient is already present -- the roughly $2.2 trillion in stimulus money that the Federal Reserve has pumped into the economy. Other sources of concern include emerging inflation in East Asia, booming commodity prices and the U.S. government's precarious fiscal situation. But the near-term risk of a long, damaging spell of inflation in the U.S. remains low.
To start, the Fed’s balance sheet is unlikely to remain extremely large. When the U.S. economy strengthens, the Fed will quickly rein in the extra cash to dampen the threat of inflation.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
And inflation in East Asian countries, such as China, South Korea and Indonesia, will not spread to the U.S. because inflation in that part of the world has been triggered by government-imposed currency rigidity. A booming economy typically leads to a strengthening of a country’s currency, but governments in East Asia have intervened to keep their currencies fixed. Prices at the local level have risen as a result, but that should have little effect on inflation in the U.S.
Another source of inflation concern is a dramatic rise in commodity prices. Yet the oil shocks of the 1970s taught us that the effect of surging commodity prices on inflation is short-lived unless poor monetary policies compound the problem. Unlike the U.S., Germany and Japan experienced only short bouts of inflation during the 1970s because their central banks did not increase the growth rate of those nations’ money supplies.
The large U.S. budget deficit may seem to be another inflationary red flag. The thinking is that the U.S. could dig such a large hole for itself that it would be cut off from the private debt markets. In this scenario, the U.S. would need to print money to repay its debts and would then suffer the inflationary consequences. But the U.S. is neither Greece, Portugal nor Ireland, where incomes can’t keep up with national debt burdens.
The recent natural disaster in Japan and upheaval in the Middle East and North Africa are more likely to push U.S. inflation lower on balance. However, the situations in these regions -- and their impact on supply, demand and the other inflation fundamentals -- are still developing. All things considered, the U.S. economy remains solid, and inflation will likely not develop into a major problem here in the next few years.
What’s your take? Please join the discussion about inflation on our Facebook page or in the comment box below.
Michael Dueker is the chief economist of Russell Investments and a former research economist at the Federal Reserve Bank of St. Louis.
GO BACK TO OUR INFLATION DEBATE MAIN PAGE: WILL INFLATION TAKE OFF?
-
Why Taiwan Semiconductor Stock Is Falling After Earnings
Taiwan Semiconductor beat expectations for the first quarter but its stock is notably lower. Here's why.
By Joey Solitro
-
Strategies to Optimize Your Social Security Benefits
To maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
By Jason “JB” Beckett Published
-
The Robots Are Coming... But Not For a While
The Kiplinger Letter There’s excitement in the tech sector over the potential of humanoid robots, but widespread adoption is likely to be years away.
By John Miley Published
-
Farmers Face Another Tough Year As Costs Continue to Climb: The Kiplinger Letter
The Kiplinger Letter Farm income is expected to decline for a second year, while costs continue to up-end farm profitability.
By Matthew Housiaux Published
-
H-1B Work Visa Rules Get a Revamp
The Kiplinger Letter H-1B visas allow employers to hire high-skilled foreign workers. Regulators have finalized new rules for this visa program following last fall's proposal.
By Matthew Housiaux Published
-
Woes Continue for Banking Sector: The Kiplinger Letter
The Kiplinger Letter Regional bank stocks were hammered recently after news of New York Community Bank’s big fourth-quarter loss.
By Rodrigo Sermeño Published
-
Are College Athletes Employees of Their Schools?: The Kiplinger Letter
The Kiplinger Letter A recent ruling has ramifications for labor relations and the unionization of student athletes.
By Sean Lengell Published
-
Salton Sea Clean Energy and Lithium Project Gets Approval: The Kiplinger Letter
The Kiplinger Letter California's Salton Sea is due to see the construction of a new lithium extraction and geothermal clean energy power plant.
By Matthew Housiaux Published
-
More Woes for Anheuser-Busch as a Strike Looms: The Kiplinger Letter
The Kiplinger Letter Drinkers of Anheuser-Busch beers may want to stock up soon. A looming strike threatens to shutter its U.S. breweries later this month.
By Sean Lengell Published
-
The Auto Industry Outlook for 2024
The Kiplinger Letter Here's what to expect in the auto industry this year. If you’re in the market for a car it won’t be quite as daunting as it was during the pandemic and after.
By David Payne Published