INFLATION in the United States is low, and seems to be going down if it is moving at all. The Federal Reserve thinks it will be years before there is any significant inflation.
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But that is not the way many Americans see it. Gasoline prices are on the rise as the Libyan fighting intensifies, and some food items have risen. The high price of gold — more than $1,400 an ounce — is viewed by many, including some in Congress, as proof that rampant inflation is near.
Testifying in Congress this week, Ben S. Bernanke, the Fed chairman, tried to be reassuring. “The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation,” he said.
Yet inflation anxiety is rising.
“Are the Fed and the public on different planets?” Dennis Lockhart, the president of the Federal Reserve Bank of Atlanta, asked in a speech last month. “There seems to be a disconnect between what the Fed is saying and what people are experiencing when they fill up their gas tanks or read about rising food prices around the world.”
The inflation rate most closely monitored by the Fed is one few noneconomists have ever heard of — the personal consumption expenditure deflator. In concept, it is similar to the Consumer Price Index, but it is based on changes in prices of items that are actually used during a period, rather than on a fixed basket of purchases. This week, the Fed announced that the index level for January was up just 1.2 percent from a year earlier.
The increase in the core rate — the rate excluding volatile food and energy prices — was only 0.8 percent. As can be seen in the accompanying chart, it has never been lower in the years since the government began keeping the figure in 1959.
The Fed’s goal is to keep the inflation rate at or near 2 percent, and it does not expect a significant increase for at least a few years. In January, nearly all members of the Fed’s Open Market Committee thought that both the core rate and the overall rate would not rise above that figure through 2013, as can also be seen from the chart. The stock market is generally thought to do better when inflation is falling, but Martin Fridson, the global credit strategist for BNP Paribas Investment Partners, points out that is not always the case. There is, he says, a time when inflation is too low.
The accompanying chart, based on a report by Mr. Fridson, shows that from the 1940s through the 1990s, there generally was a relationship. The more inflation declined in a decade from inflation in the previous decade, the better the stock market did.
But in two decades, the 1930s and the first decade of this century, inflation fell from already low levels and the stock market suffered. “Below a certain level of inflation,” Mr. Fridson said, “a further decline reflects economic weakness more than it reflects a salutary reining in of excessive monetary creation.”
If that is correct, then it could be that both investors and those simply concerned with promoting economic growth should, as Mr. Fridson wrote, hope that Mr. Bernanke “fails in his stated goal of holding inflation to 2 percent or less.”
Floyd Norris comments on finance and the economy in his blog at nytimes.com/norris.
This article has been revised to reflect the following correction:
Correction: March 4, 2011
An earlier version of the chart that accompanies this column misstated the "Average Annual Inflation Rate" for the 1960s as 2 percent and the "Change from Prior Decade" as 2.3 percent.
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