Economist’s Corner – Inflation Genie Still in the Bottle

By Lynn Reaser

With gold prices hitting all-time highs, gasoline over $3.00 a gallon, and commodity prices soaring, many are beginning to fear an outbreak of inflation.  As deficit spending rises and the Federal Reserve pumps unprecedented amounts of money into the economy, does a wave of rapidly rising prices loom?

The latest data suggests not now.  Consumer prices edged up just 0.1% in December from the prior month.  Compared with the prior year, prices ended 2009 up 2.7% because of the rebound in oil prices.  Food prices dropped 0.5% over the year.  Excluding food and energy, where prices can be extremely volatile, prices rose a restrained 1.8% for 2009 as a whole.

The downward pressure on the housing market has helped constrain consumer price inflation during the past year.  Housing expenditures account for more than two-fifths of the Consumer Price Index.  The overhang of vacant housing has depressed rents and other shelter-related costs.  Continued price cuts for various consumer electronics products have also tempered the inflation picture facing consumers.

Some companies and industries have tried to better control their inventories and regain some pricing clout.  Apparel prices ended up last year up about 2%.  Health care costs continue to rise faster than a lot of prices, up 3.4% last year, while the cost of education climbed 4.7%.

With most firms possessing a limited ability to boost prices substantially, while employees lack bargaining power on the wage side, look for inflation to be relatively benign in 2010.  As the economy starts to absorb its excess capacity, inflation is like to be a bigger challenge facing Federal Reserve officials during the next two to three years.


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