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Question:


Should I be concerned about inflation?
-DebraAnn


Answer:


It depends how far out into the future you want to look. Prices of certain food commodities flared up a few months ago, mostly due to one-off factors like a severe drought in the Midwest. Apart from that, inflation has been well behaved for years, because economic growth has been so tepid and because we appear to be nowhere near the end of two trends that tend to keep prices low.
 
One is globalization. As much as people complain about jobs being exported to the developing world, it’s a lot cheaper for manufacturers to make things there than the United States, and that makes the finished products cheaper when we go shopping for them. Similarly, those call centers in India and the Philippines keep down the cost of services. The other key trend, the technology boom, has lowered costs in several ways. It has brought us the Internet, and with it such innovations as online retailing, as well logistical advances that allow companies to run more efficiently. And, of course, there are low-priced big-screen televisions and the like as far as the eye can see.
 
Another trend, more recent but also unlikely to end soon, is more disturbing. An unprecedented easiness of monetary policy by the Federal Reserve has been undertaken to try to give the global economy a boost. It seems to have had little impact other than to raise prices of financial assets like stocks and bonds. Because the loose monetary policy involves printing many billions of dollars, it should have resulted in a significant expansion of the money supply.
 
That alone would be inflationary because having a greater amount of money available for the same amount of goods and services is the very definition of inflation. So far the money supply has not expanded much because banks are afraid to lend out the new money, so they plow it into government debt and send it right back to the Treasury, where it came from. If and when the economy picks up and banks start lending vigorously again, inflation could bubble up and the Fed may have to tighten policy in a hurry, stunting the economic growth that it worked so hard to enhance.
-Conrad de Aenlle



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