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Tea Leaf: A Greek stitch in time?

Published: Tuesday, June 21 2011 3:54 p.m. MDT

Consumer inflation has been on the rise during the past six months, one more "anxiety" issue to add to an already crowded list of domestic and global issues. The consumer price index — the most well-known, if not necessarily the most highly regarded, measure of consumer inflation — has now risen 3.6 percent during the most recent 12-month period. That is triple the annual rate of just last summer.

The "core" rate of inflation, that which excludes food and energy costs and is one of the Fed's preferred measures of inflation, has now risen 1.5 percent during the most recent 12-month period. By comparison, the 0.6 percent annualized rise in core inflation late last year was the smallest rise in more than 50 years.

Oil up, oil down

Yes, the rise in oil and gasoline prices had much to do with the sharp inflation rise, and yes, oil prices are now in decline. However, the higher level of inflation will place a crimp in the Federal Reserve's interest in a third round of massive monetary stimulus, affectionately known as "quantitative easing 3," or QE3.

There is little doubt that Fed boss Ben Bernanke has been more concerned about the threat of deflation rather than inflation during much of the past 2-3 years. Even as inflation pressures have climbed in recent months, the Fed chairman sees the increase as temporary.

Bernanke sees an inflation rise that will soon largely reverse direction as energy prices decline and global bottlenecks, particularly tied to auto part shortages resulting from the Japanese earthquake/tsunami, run their course. He sees an economy where there is simply too much excess labor capacity to sustain any serious rise in inflation.

That debt thing

There is a school of thought that higher inflation is exactly what the economy needs. The Wall Street Journal last Sunday ran a story, "What This Country Needs Is a Good 5 percent CPI," noting that the economy's primary challenge is high debt levels of individuals, corporations and government entities.

The story suggested that higher inflation would make it easier for all debtors to repay high debt levels with less valuable dollars. This approach, featuring much, much higher levels of inflation, has been used by various nations all too frequently in the past, many in South and Central America, to repay fixed debts with currencies worth much less.

The story also suggested that it was higher inflation that helped end the Great Depression, along with global involvement in WWII. In addition, the story discussed Japan's long struggle with deflation, and the challenges of escaping a deflationary environment.

One could argue that temporarily higher inflation could help stabilize U.S. housing prices. At the same time, however, keeping inflation at bay once it has become more pervasive is no easy task.

Jeff Thredgold is the chief economist for Zions Bank and founder of Thredgold Economic Associates, a professional speaking and economic consulting firm. Visit www.thredgold.com.

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