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Experts and public differ on inflation fears

by Dan Pinkerton
| June 13, 2010 9:00 PM

Things are afoot in the land of the free economy. Big things.

For the first time in several years, the threat - or perceived threat - of inflation is beginning to loom, and there are whispers in the corridors of power asking what can be done about it.

The reason for this sudden interest is more about the "when" than the "what." A dramatic rise in inflation at a time when the country and the world are still limping away from a catastrophic recession could create all sorts of fresh difficulties and long-term dangers.

Will it happen though?

Before we address that question, it's important to note that inflation can have positive or negative consequences, depending on its extent and duration. The main negative is a drop in purchasing power of money. In extreme cases, consumers may start hoarding money if they fear continued and aggressive price increases. The positive side of inflation is that it can decrease the real value of debt, or essentially provide debt relief.

We're concerned with the probability of negative inflation. However, it would be a reckless commentator to show his cards this early as even the economists remain divided about the likelihood of any real change in inflation. In 2009, the National Association for Business Economics conducted a survey that highlighted just how divided the experts are. The results showed that while close to 50 percent thought the Federal Reserve Board will successfully keep inflation down over the next couple years, another 41 percent believed the chances of seeing some significant inflation is high.

The American public, however, doesn't feel so uncertain. A survey conducted in December 2009 by the Conference Board showed that consumers expect a 5.1 percent increase in prices in 2010 alone. If correct, the consequences would be devastating.

To give you an idea why, consider that the Consumer Price Index hasn't gone up more than 5 percent in a single year since 1990 when Iraq invaded Kuwait and created a sudden surge in the price of oil.

As Greg McBride, senior financial analyst at, put it: "If inflation averaged 5 percent, that would cut your buying power in half in 14 years."

Making economic projections is far from a scientific process, so it's not surprising to find valid arguments on both sides of the divide. Those economists who happen to be right will help investors drive returns during the next three years.

The problem is that while the figures seem to confirm the American public's disquiet, none suggests that very many are doing enough about it. It could be a costly mistake as individual savings and investments would be among the first and hardest hit casualties.

So, could we avoid inflation?

That is the trillion-dollar question no one can answer now with any real certainty. Gregory Mankiw of the New York Times recently argued that while the United States is exhibiting some of the classic precursors to out-of-control inflation, a deeper look suggests that the story is not so simple. He points out that one basic lesson of economics is that prices rise when the government creates an excessive amount of money. In other words, inflation occurs when too much money is chasing too few goods.

A second lesson is that governments resort to rapid monetary growth because they face fiscal problems. When government spending exceeds tax collections, policy makers sometimes turn to their central banks, which essentially print money to cover the budget shortfall.

So, is there any hope?

The fact that soaring inflation is still only a fear, despite the U.S. apparently meeting some key criteria, must tell us that yes, there most definitely is hope.

A few go further and argue that inflation isn't something we should even fear. All we need, they say, is a convincing commitment from the U.S. government to both near-term stimulus and longer-term fiscal responsibility to keep the monster in its box.

Let's hope they're right because as recent events have clearly shown, what happens in the U.S. can have enormous consequences for the rest of the world.

And things do seem to be afoot in the land of the free economy.

Dan Pinkerton is the founder of Pinkerton Retirement Specialists, a private wealth management firm that Barron's ranked as the No. 1 Financial Advisor in Idaho in 2010, based on assets managed, years of experience, compliance records, client retention reports, types of revenues and assets advised on, and quality of practice. Securities offered through LPL Financial, Member FINRA/SIPC. Contact them at