Will the Fed’s policy of bond buying and monetary easing push us into a nightmare spiral of 1970s-era inflation? The Fed’s critics make it sound like the Inflation Dragon is just about to come out of the cave.
The markets, on the other hand, aren’t exactly quaking in fear. A careful analysis by Bloomberg’s Caroline Salas Gage today shows that the market for inflation-protected bonds hints that investors think inflation will stay right at 2 percent — just where Bernanke wants it.
Who’s right here? The Market Now is generally skeptical both of religious zeal in economics and of heavy-lidded complacency. Inflation may not be budging because despite all the Fed’s efforts, consumer spending has moved up only a very modest (non-inflation adjusted!) 3 percent in the last year, from $10.9 trillion to $11.2 trillion. In other words, it’s possible that so far Fed policies haven’t had an inflationary effect because they haven’t worked all that well.
It’s conceivable the growing gap between the top earners and others has something to do with this. The wealthy don’t spend as much of their money; it’s tough to find the time to spend, say, the $8 million-and-change a chief executive makes these days. If there’s inflation out there, it may be circulating around the highest floors, above the concerns and measures of the ordinary consumer price index (though Forbes’ index of private jet and custom shoe prices hasn’t moved much either).
International inflation bonus round: Argentina’s nationalized oil producer YPF SA is offering mom-and-pop investors 19 percent interest on one year bonds. Now banks get to figure out if they want to compete for savings with the sky-high rates paid by a government-owned company. We’ll see how that works out.
A version of this post appeared earlier in the Market Now newsletter. Click here to register at Bloomberg.com and subscribe to The Market Now daily email.