Are We Headed For Runaway Inflation? Myths vs. Realities

It's fashionable today to talk about the high prices of gold and oil, and how the Fed is printing so much money that we are going to have hyperinflation.

I'm skeptical, and columnist Steve Chapman, a member of the Tribune's editorial board, agrees with me. He laid out a compelling argument in a recent Chicago Tribune article - which I have paraphrased in the form of Myth vs. Reality:

Myth: The price of gold has doubled since Obama was elected, because investors want to hedge against an increasingly worthless dollar.

Reality: Gold has been in a long-term bull market - during the 8 years of the Bush Administration, the price of gold tripled while the consumer price index rose less than 3% per year.

Myth: The rise in oil and other commodities are caused by the Fed's actions.

Reality: Commodity prices are also affected by events outside the United States - in this case, strong demand from developing countries such as China.

Myth: The government understates inflation because the "core" inflation rate excludes food and energy.

Reality: Food and energy are excluded because they give a distorted picture due to volatility. The core rate is accurate. During the last decade, the core rate was up 21%, vs. 27% for the full inflation rate. General inflation can't exist without the core rate increasing. In the 1970's everything went up - not just food and energy.

The bottom line is that there is no evidence of near-term inflation. The market knows this, as indicated by the popularity of three year treasuries yielding 1%. They would not be in demand if people thought inflation would ravage it.

Finally, high inflation like the 1970's needed a wage-spiral. Higher prices resulted in higher wages, which resulted in higher costs. Today, there is no wage-spiral. Unemployment is high, and wages / salaries are stagnant.