Inflation: The Optimistic View

Here’s the short-term view that inflation is not a problem, from A. Gary Shilling:

The deflationary forces that I’ve been addressing since 1998 and 1999 are still hard at work. Besides global excess capacity and the increasing importance of mass retailers like Wal-Mart, robust productivity growth will be promoted by the ongoing burst of semiconductors, computers, telecommunications, the Internet, biotech and other new tech. These and other factors will, I believe, lead to an era of mild, 1% to 2% annual deflation rates—the good deflation of new tech driven productivity increases and excess supply, as was seen in the U.S. in the late 1800s and 1920s, and not the bad deflation of deficient demand experienced during the Great Depression and, more recently, in Japan.

So I see the current rise in inflation as being one more brief up tick within the disinflationary trend of the past 23 years. And, so far, the Federal Reserve apparently agrees. The central bank will probably continue to raise its federal funds target rate at a moderate pace, perhaps by one-quarter of a point every six weeks at its policy meetings, through the end of the year.

And then, as concerns about inflation turn to renewed worries about deflation, the Federal Reserve will switch from raising to cutting interest rates.