I get this question a lot and my standard answer is, “If I knew that, I would be a very rich man.” In all seriousness, it is difficult to predict and no one knows what will happen. However, in trying to read the tea leaves, it would seem the answer is yes it is coming and probably in the not too distant future.
On Friday, our Federal Reserve Chairman Ben Bernanke gave a speech and openly discussed that inflation at less than 2% is too low and why the Fed must encourage greater inflation to reduce our huge jobless rate. "Inflation is running at rates that are too low relative to the levels that the (Fed Open Market) Committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run," he said. That dual mandate is to maintain stable prices and low unemployment.
With the U-6 unemployment rate at 17.1% the Fed is clearly concerned about jobs and the short term pain associated with it. We currently are in a flat or deflationary period – meaning the price of goods and services are falling or staying flat. The problem with low inflation or deflation is that it is not just a sign of a weak economy. It can actually make a weak economy even weaker.
One of the problems we have right now is that consumers and businesses aren't spending. Part of that is because many are uncertain where the economy is headed. If you are not sure if you will have a job in a few months, you will likely not buy a house or car. Businesses don't know if they will have customers, so they don't spend money on hiring or increasing production.
But when inflation is low, there's another reason people don't spend. Why buy something now when you can buy it a year from now at the same price, or maybe even a lower price. Of course, if the Fed just ends up driving up prices and not actually boosting consumption, then the economy will end up in a worse situation than we are in right now. That seems to be a risk Bernanke is more and more willing to take.
Gold is a key leading indicator of inflation and it has soared this year, particularly lately. It is obvious of where the markets think inflation is headed (up) and where the dollar is going (down). The problem with trying to create inflation is that in order to do so requires the dollar to fall in value – something I wrote about before.
My concern is that as we continue to print more money in an effort to create “good inflation,” we may well end up with something that resembles the 1970’s and “bad inflation.” I would love to hear your thoughts on if you think inflation is coming and when it might arrive.