Inflation—too much of it—is highly undesirable, for a number of reasons. I think the worst effect is that it diverts investors’ attention towards beating inflation, and therefore away from innovating and job-creating. That’s why I habitually watch what the experts have to say about inflation, and that's why I post the USA Inflation Meter in tandem with the National Debt Thermometer.
Recently I’ve been watching more closely than usual, because the bond market, the recent economic indicators, and the economic pundits are all throwing off mixed signals. Result: Cognitive dissonance.
What’s cognitive dissonance? Remember in the movie Alien, when freshly-decapitated robot Ash was uncontrollably spinning around the cabin, bouncing off walls, and squirting robot-juice all over the place? Well, that’s what the economics profession does when it can’t agree on whether inflation is rising, falling, or treading water. That’s cognitive dissonance. (I do like it in one respect: it adds an entertainment dimension to economics.)
To illustrate, here’s what a sampling of economists and pundits have said recently about the inflation outlook (in no particular ideological order):
Greenspan: “As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging. As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building.” [link] [By the way, this is also an example of why I think Greenspan should read this book.]
Reich: “...the Fed is fighting a ghost. Inflation is in no danger of getting out of control.” [link]
Kudlow: “Please allow me to express my skepticism over the likelihood of a significant inflation breakout to the upside.” [link]
Kash: “. . . the market seems to expect no further increase in inflation. Myself, I'm less sanguine.” [link]
Krugman: “. . . inflation is creeping up, and it's doing so despite a labor market that is in worse shape than the official unemployment rate suggests.” [link]
Wesbury: “Despite recent weakness in economic data, our forecast continues to include robust growth accompanied by accelerating inflation. As a result, we expect the fed funds rate to be 4.50% by year end.” [link]
For what it’s worth, whenever the economics community as a whole is suffering from cognitive dissonance (as it is today), I usually rely on Brian Wesbury’s guidance. Besides being correct a lot, his writings are brief, to the point, fact-based prognostications. Objectivity overwhelms ideology in Brian’s writings; that, I'm noticing, is rare in the world of economics, which was recently called “politics masquerading as science.” Visit Brian’s website and see what I mean; subscribe to his email reports, too.
Anyway, at the bottom of my Debt Thermometer post for April, I added a chart of key interest rate trends, using the Fed's month-by-month data. The chart below turns up the magnification by showing the weekly data (as opposed to the monthly data on the other chart).
Click to enlarge. 
If the market perceives rising inflation, we should see the interest on the 20-yr bond begin to rise. Is it? Even when I turned up the magnification (from monthly data to weekly), it was inconclusive. If all I had to go on was the chart, I’d probably lapse into cognitive dissonance.
Fortunately, the chart is not all I have to go on. I also have Brian Wesbury’s guidance. “Accelerating inflation” is what he sees, and that’s an ominous cloud looming over the economic growth landscape. This bears close scrutiny in the coming weeks and months.
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UPDATE, 10:45pm Monday, May 2, 2005: I just found out that Brian Wesbury will be co-hosting CNBC's Squawkbox tomorrow morning, 6-9am Central time. Listen to him and see what I mean. I'm going to TiVo it. (FYI, "TiVo" is a verb now, not just a noun.)
