My new column for the FT responds to a recent article by James Surowiecki, who argues that fears about inflation are exaggerated and even ridiculous at the moment. I say that the threat, even if not imminent, should be taken seriously.
To be sure, both deficit spending and the Fed's recent measures could, in theory, create inflationary pressure. But they haven't, because they've just gone to counteract the sharp decline in consumer and business activity. The government is borrowing more, but consumers and businesses are borrowing less. As for the money the Fed has been pumping through the banks, much of it hasn't actually made it into the economy; banks are keeping hundreds of billions of dollars in reserves on hand. If the definition of inflation is too many dollars chasing too few goods, the too many dollars aren't out there. In the real economy, meanwhile, worker productivity is tremendously high; wage growth is stagnant; and there's still an enormous amount of slack--capacity that's not being used and people who don't have jobs. All of these things will put a lid on price pressures for some time to come.
Then why are people afraid that inflation is about to get out of control? Because they're always afraid that inflation is about to get out of control.
Fear of inflation can be taken too far, but this is complacent. It is too soon to worry about inflation in the same way it was too soon in 2005 to be concerned about securitised mortgages and house-price bubbles. The US economy's immediate problem is indeed stagnant output, not surging prices - but you do not need extraordinary foresight to see how this could change. Monetary and fiscal policy both need to stay loose for now, but a little thought about the next big economic-policy challenge would not go amiss.
At the very least, you have to acknowledge that the Federal Reserve faces an entirely new set of problems. This is not just because the recession has been so severe, but also because its interventions during the course of this crisis have been unprecedented in range and scale.