Repeat After Me . . . .

Inflation is not a problem. It might be, and likely will be in the longer term future, but it is not now. Even that bastion of free-spending, left wing thought, the Economist, is making this argument:

A month ago, I probably would have said that while inflation basically posed no threat in the short- to medium-term, the risk of deflation had been more or less eliminated thanks to Chinese growth and the effect of ample central bank liquidity on asset prices. Now, I'm not so sure. Markets have lost nearly 7% of their value in the past two weeks. Commodity prices have tumbled, as well. China's government is tightening. The American economy has yet to return to steady job growth, and the momentum in American housing markets appears to have hit a winter plateau (while rents continue to decline). Loan demand among businesses and households continues to weaken. James Hamilton reviews the evidence and concludes:

My bottom line: the scales tipped last week in the direction of near-term deflationary pressures, despite the strong 2009:Q4 U.S. GDP report and falling unemployment rate.

I'd have to agree. This is a dangerous time for the global economy. Policymakers seem to be overestimating the return to stability. I'd say the argument for forgetting about inflation entirely until we see two quarters of core inflation at or above a 3% annual rate is quite strong.

None of the fundamentals are strong. Market optimism and a renewed housing bubble do not a recovery make. While we are not likely to return to the depths of last winter, a market decline of 20% is not unthinkable. In less than three weeks, we are half way there.

As I have said so many times, talk of inflation is ideological. It arises from political fears that governments are set to take a much larger role in economies worldwide.