Survey: Inflation to Jump 200% in 2011

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Among the things the recent recovery may lack – jobs, for one – there is one thing we have in abundance: Inflation worries. And why not? Food prices are rising. Gas prices are rising. And many think the Federal Reserve’s efforts to boost the economy could lead to massive inflation. About six months ago, Sarah Palin and Glenn Beck began whipping the Tea Party and their other many followers into an inflation fear frenzy. And, of course, there was the famous Ben Bernanke bear video.

Now Americans in general seem to be catching inflation fever. Last week, the Conference Board reported that when it asked Americans last month what they think inflation will be a year from now, the average response was 6.7%. That would be a huge jump from where inflation is now. In the past year, prices are up just 2.2%. If inflation were to jump to 6.7% that would be a 205% increase in the rate of inflation in one year.

How likely is that? Not very. Here’s why:

First of all, the last time inflation in this country topped 6.7% was nearly 30 years ago in July of 1982. The last time we were close to that rate of price increase was in the middle of 2008, when inflation reached 5.5%. But that was at a time when the economy was booming, which is usually when you get inflation. And with an unemployment rate of 8.8%, it’s hard to argue that the economy is in a boom.

Even more importantly, huge jumps in inflation tend not to happen that often. And a jump of over 200% in one year in inflation hasn’t happened in at least 50 years, perhaps longer. ( I only looked back to 1960.) Even during the 1970s inflation didn’t jump more than 200% in one year. The biggest jump back then was in December 1973 when inflation jumped 161% to 8.9% from 3.4% the year before. In August 2008, inflation jumped 179% from the year before to 5.3%, but again the economy was at the end of a long boom. The one exception was a jump last year of year-over-year inflation to 2.2% from 0.1% the year before. That was a huge rise, 2100%. But that was off such a low rate it doesn’t really count. And inflation that low, which is to say basically not existent, can be bad for the economy as well.

Of course, that’s not to say a 200% jump in inflation couldn’t happen this year. Indeed, members of the Federal Reserve’s policy committee, which released the minutes of its March meeting on Tuesday, seem a little more worried than it did about inflation just a few months ago. The US central bank’s policy committee members worried that rising gas and food prices could trigger a general price surge. Though they said, for now, underlying measures of inflation remained low.

And in a piece on Tuesday, the Washington Post claims that inflation is already quite high. The article says that if you look at just the past three months, inflation is already rising at an annualized rate of 5.7%, pretty close to that 6.7% prediction. Annualized meaning if you take the rate it has moved up in the past month alone (I think here they may have been looking at a three-month average-a short time period nonetheless) then assume inflation will continuing rising at that rate for a whole year you get the projected annualized rate. But the problem with that analysis is that monthly rates rarely hold for a whole year. In June 2009, for instance, inflation jumped 0.7% that month. Annualize that rate and you would think that inflation was on a path to be up 8.4% in the next year. In fact, inflation only rose a 1.1% over the next 12 months.

Hot Air, a blog that is a favorite of Tea Party types, cheered the Wash Po article saying it was about time others were recognizing the coming inflation danger. Unlike the Washington Post, though, Hot Air landed on the fact that inflation was being driven by rising energy prices. And that does seem to be true. But if you believe that, then you also have to believe that the recent jump in inflation is probably coming to an end or at least leveling off. Gas prices have for the time being stopped rising. And the slow down in Japan will probably hold gas prices in check for the next few months.

Lastly, typically the biggest driver of inflation is wages. And in the most recent jobs report, wages weren’t rising. Wages were flat from the month before. And as long as we have 14 million Americans out of work, it’s hard to see a big jump up in wages.

So where does that leave us? Yes inflation may increase, and likely will. It always does in recoveries. But will inflation jump as high as many Americans think? Probably not. If you’ve got inflation fever, it’s probably time to stay indoors for a little bit, have some chicken soup and start to feel better.