The inflation bugaboo, back again for QE3

Scare stories on an expected uptick in price expectations

If you’ve followed the financial press or have seen Ron Paul talk in the last few years, you’ve heard all about the supposed runaway inflation we’re about to experience any day now because of all the money the Fed is printing.

We’ve had four years of warnings and yet inflation has remained extremely low because of a seriously depressed economy. If the printing presses hadn’t been humming in the last few years, a deflationary spiral wasn’t out of the question.

Now Ben Bernanke has finally embarked on a third round of quantitative easing, and, crucially, has committed to a medium-term policy of loose money in a bid to help an economy that can’t quite get into second gear. That has raised investors’ expectations of future inflation and caused at least a few papers to trot out the inflation-fears story.

The Financial Times on Monday headlined a story, “US inflation fears rise after QE3.”

A Guardian headline on Tuesday said, “High inflation leaves UK in doldrums.”

And a headline said, “Is Inflation Back From the Dead? The Fed’s latest moves have revived fears among bond investors.”

It can only be a matter of days before The Wall Street Journal editorial page trots out the “bond vigilantes,” which it told us in May 2009 were “back” because of Obama’s stimulus spending and the Fed’s money printing.

So should you start hoarding precious metals and heading to True Value to buy a wheelbarrow for a future purse?


It’s worth remembering that the same day of that WSJ editorial, the yield on 10-year Treasury bonds was at 3.71 percent. Yesterday, three and a half years and trillions of dollars in government spending and money creation later, 10-year T-bonds yielded 1.77 percent. Oops.

The FT’s story talks about “inflation fears,” but the measure—the difference between regular T-bonds and inflation-protected ones—implies a decade of 2.73 percent annual inflation. That would put it at roughly the average from 1990 to 2010, and far below that of the 1980s.

Paul Krugman, whose views and predictions on this topic have been validated throughout the entire bust, flags the FT’s story, noting that higher inflation expectations are what Bernanke intended when he announced easy money through 2015:

On the contrary, it’s the whole point of the exercise. For almost fifteen years, some of us have argued that central banks can gain traction even in a liquidity trap if they can create expectations that money will remain loose after the economy recovers, generating modestly higher inflation. And that’s what the Fed’s new tack is supposed to achieve.

The right headline on that FT article should have been “QE3 working so far”.

SmartMoney, at least, points out that this is not the first time the inflation bugaboo has popped up in this recession, and it writes that “For the past few years, the Keynesians have had the better of the data. Make of that what you will.”

The Guardian, though, writes that the UK’s 2.5 percent rate is “High inflation (that) has been a crucial factor in pushing the UK economy into a double-dip recession over the past year.”

But 2.5 percent is not high at all, and the UK’s latest recession was caused by austerity policies foisted on an already weak economy, not inflation.

So beware the inflation scare stories. We’ve seen them before.

Back in the U.S., the economy is still very weak, there’s a massive overhang of debt that low inflation makes harder to pay off, and the Fed is finally trying to shift a bit toward the jobs side of its dual mandate.

Further Reading:

The Turkey-Inflation Goblin. Supply and demand is lost on the WSJ editorial page.

SmartMoney is confused on wages, inflation. When prices matter and when they don’t

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,