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Is the Ugly Inflation Beast About to Gore the Economy?

QE3 cares more about jobs than creeping levels of inflation

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The good news is that Richmond Fed President Jeffrey Lacker — who has dissented in every Fed move of 2012 – said this week that he is not taking his eye off inflation no matter what. Take these excerpts from a recent Reuters story (emphasis mine):

” ‘I dissented on the question of a new asset purchase program because, in such circumstances, further monetary stimulus runs the risk of raising inflation in a way that threatens the stability of inflation expectations,’ Lacker said …

He also cautioned against using estimates of the sustainable long-run rate of joblessness as a benchmark for policy.

‘Perceptions that the Committee was focused on reducing unemployment at the expense of maintaining price stability would undercut that confidence and destabilize inflation,’ Lacker said.”

So will Lacker and those like him be able to stop runaway inflation if and when it starts to rear its ugly head?

Maybe. Or heck, maybe inflation isn’t that much of a concern like some of the QE3 proponents are saying.

But it’s not that simple. Cullen Roche over at Pragmatic Capitalism has a great long-term take on inflation that’s worth sharing:

“While the BLS data was tame, my Housing Adjusted CPI came in hot compared to last month. The year over year reading of 1.6% is a full half-percentage point higher than last month. This is a clear sign that improving housing prices are starting to filter through the economy.

This could make for an interesting environment going forward.  …  And with the Fed’s latest QE program we’re likely to see other prices rising as expectations change. We know that long-term inflation expectations spiked on (QE3) news.

But it’s also important to keep things in perspective. The long-term average rate of inflation is about 3.5% so even if year-over-year rates were to double from here we’d be back to average. In other words, this economy is still operating well below capacity with pricing power so low. So maybe a little inflation going forward wouldn’t be such a bad thing.

The concern with QE3 is that the inflation comes from the wrong places like speculation in commodity prices filtering through to gasoline prices, etc.”

In short, while inflation rates remain below danger levels to some, they could be creeping up — and creeping up in the ugliest places of all like food and gasoline, forcing consumers to allocate more cash to necessities and cut back on spending.

The pressure and risks of inflation are clear. The only question is whether or not we trust policy makers to keep a lid on things before they get out of hand.

It also doesn’t help the risk-averse that even with a modest rate of inflation, say 2.5% to 3% a year, a savings account is literally a money-losing investment. If rock-solid Treasuries and investment-grade bonds can’t even keep up with that “modest” inflation … well, we don’t have to see a double-digit rate of CPI growth to erode savings and purchasing power.

For savers, that’s clearly already happening with zero interest rate policies.

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via@JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

Article printed from InvestorPlace Media,

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