Anybody who has lived through the 1970′s can tell you that high inflation is an economic nightmare that can crush economic growth. Many economists and policymakers will do anything to avoid a repeat of that scenario. There are definitely signs of inflation rearing its ugly head again today, but the big question is whether or not we should be worried about it at this time.
Mixed Signals
In many cases, it depends on what you are focusing on to determine whether inflation is a problem these days. Ask purchasers or food (which is everybody), and they will tell you that inflation is rampant. Commodity prices have been going through the roof, which inevitably leads to higher food prices. Companies such as General Mills (GIS), Starbux (SBUX), and Kraft (KFT) have all raised their prices recently.
Energy is another example of a sector where inflation is popping up. Oil prices have soared since their recessionary depths due to a myriad of reasons. I have been shocked at the level of my heating bill these past few months, and I suspect I am not alone. Several economists are predicting gasoline prices to rise dramatically soon, which will crimp the consumer.
However, there are a few places where prices are not rising, and even falling. Housing still can’t seem to get out of its way as prices are still dropping in many areas of the country. Rising home prices were a factor in the mortgage bubble a few years ago that popped, causing a nasty recession.
The Big One
Rising wages are a huge contributor to inflation according to many economists, and on this front, we have nothing to fear. Wages have been stagnant and the labor market is still in poor shape. The Fed keeps a close eye on this statistic as it evaluates inflationary pressures. Low wage growth is one reason it feels comfortable flooding the economy with money. Ironically, I think the market would selloff if wages started to rise because it would mean that the Fed would stop printing money. It is a classic case of Wall Street versus Main Street. Higher wages are great for the latter, not so much for the former.
I think the bottom line is that inflationary worries are still a bit premature, but certainly should be kept on the radar. If housing and especially wages remain tame, than overall inflation will be kept in check. If not, look out above.
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