NCPA - National Center for Policy Analysis

Fears of Inflation Misplaced

January 29, 2004

Despite the rising price of gold and a falling dollar, economist Larry Kudlow suggests that inflation will not exceed 2 percent over the next couple of years. This is good news, he says, because the economy looks to grow by a real 6 percent over the next year, with the stock market gaining 20 percent.

Inflation fears have arisen because today's high gold price and weak dollar signal there is excess money in the system. However, Kudlow asserts that this liquidity will be absorbed by the following mitigating factors:

  • Reduced marginal tax rates on personal income, dividends and capital gains are reducing the cost structure of the economy, which lead to lower prices.
  • Moreover, the economy is experiencing higher worker productivity, resulting in reduced labor costs while increasing real wages and real output.
  • Compared to 30 currencies, adjusted for prices, the dollar has fallen only 13.5 percent from its excessive peak two years ago.
  • European monetary policy is too tight -- the expected interest-rate cut overseas will stabilize the dollar against the euro.

Ultimately, claims Kudlow, more money will be chasing even more goods and services in the economy, thus extinguishing the threat of rising prices.

Source: Larry Kudlow, "Dead-wrong inflation hawks,", January 9, 2004.


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