NCPA - National Center for Policy Analysis

Inflation Worries Unfounded

May 13, 2011

Gas is going for more than $4 a gallon, gold is riding a boom, and the Federal Reserve is seemingly complacent about these developments.  Among critics of Barack Obama and Ben Bernanke, the consensus is clear: Inflation is making a comeback, says Steve Chapman, a columnist and editorial writer for the Chicago Tribune.

The claim has a surface plausibility.  If the money supply is growing and prices are rising, what more evidence do we need?  But first impressions, in this case, are badly misleading.

Take the price of gold.       

  • It has more than doubled since Obama was elected in November 2008, allegedly because investors want a hedge against an increasingly worthless currency.        
  • But gold prices were also on a rocket during the previous eight years, and they were not a portent of raging inflation.        
  • During the administration of President George W. Bush, the consumer price index (CPI) rose at an average rate of less than 3 percent per year -- while gold was tripling in value.

Bentley University economist Scott Sumner attributes rising prices for oil and other goods to strong demand in developing countries, particularly China.

Though some U.S. prices have jumped recently, most have not.        

  • The "core" inflation rate, which includes everything except food and energy, was 1.2 percent over the past year.        
  • That may seem painfully irrelevant, given the supreme importance of groceries and gas, but you can't have general inflation without core inflation.

Comparisons with the last serious bout of inflation, the 1970s, suggest that today's worries are misplaced.  Back then, it wasn't just fuel and food that soared: The cost of everything soared, says Chapman.

Source: Steve Chapman, "Is Inflation Making a Comeback?" Reason Magazine, May 12, 2011.

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