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Inflation versus Deflation: Two Experts Disagree
By Robert Huebscher
March 29, 2011

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Low inflation indefinitely

Taking the other side of the debate, Everson said there will “low inflation indefinitely,” and she presented her arguments in three parts.

Most consumers experience inflation directly through food and energy prices, and Everson said that those prices are already increasing and grabbing headlines.  What is less obvious, however, is that other prices – notably clothing/apparel and other personal goods – are declining at a rapid rate.  So, claims that inflation is already on the rise are exaggerated, according to Everson.

“Families who are being asked to spend more on food and energy can delay these things,” she said. This is why the unemployment rate matters so much, because the labor market is a source of cash for consumers, and cash is what it takes to keep families spending, she said.

With unemployment still far above its “normal” level of 4.6%, and with industrial capacity utilization still far below its historical levels, Everson said there will not be enough consumer demand and cash across-the-board to allow producers to raise their prices “and get away with it.”

“That is inflation, after all,” she said.  “We would all raise prices if we could get away with it.”

Part two of Everson’s argument centered on the growing federal debt.  While she did not deny the enormity of those obligations, she said a more significant factor is that corporate and bank credit demand has been shrinking – at least until the end of last year.   Modest increases in bond yields threaten further growth in credit demand, although Everson said that she doesn’t expect a spike in interest rates.  For now, she said, there needs to be an increase in credit activity before inflation can take hold.

Her third point attacked the argument that US monetary policy is fueling inflation overseas that will eventually be exported back to the US.   Everson said that increased prices in foreign markets are the result of monetary liquidity.  She acknowledged that food prices rise to reflect changes in consumers’ taste and population growth, but she said the recent changes have had more to do with increases and decreases in “speculative liquidity.”  “Pricing behavior is way in excess of how we were behaving at our dinner tables,” she said.

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