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?
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
The Surprising Truth About Loneliness and Longevity
We've all heard about the epidemic of loneliness that can shorten lives and make retirement miserable. But there's more to the story.
-
The Dollar Index Is Sliding. Is Your Portfolio Prepared?
The Dollar Index Is Sliding. Is Your Portfolio Prepared? The dollar's fall has been troubling because inflation appears to be constrained and the economy has been strong. Here's what it means for investors.
-
AI-Powered Smart Glasses Set to Make a Bigger Splash
The Kiplinger Letter Meta leads the way with its sleek, fashionable smart glasses, but Apple reportedly plans to join the fray by late 2026. Improved AI will lure more customers.
-
Breaking China's Stranglehold on Rare Earth Elements
The Letter China is using its near-monopoly on critical minerals to win trade concessions. Can the U.S. find alternate supplies?
-
What New Tariffs Mean for Car Shoppers
The Kiplinger Letter Car deals are growing scarcer. Meanwhile, tax credits for EVs are on the way out, but tax breaks for car loans are coming.
-
AI’s Rapid Rise Sparks New Cyber Threats
The Kiplinger Letter Cybersecurity professionals are racing to ward off AI threats while also using AI tools to shore up defenses.
-
Blue Collar Workers Add AI to Their Toolboxes
The Kiplinger Letter AI can’t fix a leak or install lighting, but more and more tradespeople are adopting artificial intelligence for back-office work and other tasks.
-
Will State Laws Hurt AI’s Future?
The Kiplinger Letter Republicans in Congress are considering a moratorium on state AI laws. But it’s likely a growing patchwork of state AI regulations will be here for a while.
-
The Economic Impact of the US-China Trade War
The Letter The US-China trade war will impact US consumers and business. The decoupling process could be messy.
-
AI Heads to Washington
The Kiplinger Letter There’s big opportunity for AI tools that analyze MRIs and other medical images. But also big challenges that clinicians and companies will have to overcome.