Should we worry about inflation?

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"Until recently, inflation seemed to be dead or, at least, in a prolonged state of remission," said Robert Samuelson at The Washington Post. Thanks to cautious companies holding down wages and prices in the aftermath of the recession, annual inflation between 2010 and 2015 averaged just 1.5 percent, "often too small to be noticed." But it has recently inched up, hitting 2.1 percent in both 2016 and 2017. Now there are fears that inflation is about to charge ahead. In January, the Consumer Price Index, which tracks everything from the price of groceries to education costs, surged 0.5 percent; at that pace, annualized inflation would hit 6 percent by the end of the year. It almost certainly won't go that high, but it leaves newly installed Federal Reserve chairman Jerome Powell "facing a tricky task": to contain inflation "without killing the economy." Traditionally, the Fed would respond by raising interest rates, said The Wall Street Journal in an editorial. That's all well and good, especially after a decade of near-zero rates. But the "potential game changer" is that the corporate tax cut and President Trump's deregulatory agenda could rapidly accelerate economic growth. That could further fuel inflation, prompting the Fed to raise rates faster than anticipated. In the worst-case scenario, this will severely roil markets and darken the economic outlook.

"No one is talking about returning to the bad old days of the late 1970s," when prices rose more than 10 percent a year, said Evan Horowitz at The Boston Globe. Yet the market's collective freak-out last month was largely due to inflation worries. That overblown reaction doesn't make sense. Far from heralding "impending economic doom," a minor inflation bump could actually be a good thing, by helping us prepare for the next recession. The Fed's most potent tool in fighting downturns is cutting interest rates. "Total cuts of 5 to 6 percentage points have been the norm in recent recessions." But you can have a 5 percent rate cut only if you start with rates that are over 5 percent. Right now, the Fed's key interest rate is just 1.5 percent, leaving the U.S. "more vulnerable to recession than we've been in decades." The solution? A little inflation. All those traders and investors "who are now demanding inflation-fighting belt-tightening by the Fed seem to have lost perspective on the subject," said Daniel Moss at Bloomberg. "Are inflation and interest rates headed higher? You bet. Dramatically? Probably not."

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Still, Powell should step carefully, said Sebastian Mallaby at The Washington Post. Goldman Sachs expects the Fed to raise interest rates eight times over the next two years, largely to head off higher prices. "The Trump team isn't going to like this," because no president wants the central bank to put the brakes on growth. That could put Trump and Powell on "a collision course," especially if the president tries to meddle in monetary policy. "We have a long way to go until inflation is a real threat again," said Howard Gold at Market Watch. When prices surged in the 1970s, the booming economy of the earlier two decades had allowed unions to demand far higher wages, and new social programs and spending on the Vietnam War poured "fiscal fuel onto the fire." There are few parallels today. Sure, inflation may "pick up a bit," but nothing "as bad as doom-and-gloomers expect."