The latest minutes from the Federal Open Market Committee, the panel that sets interest rate policy for the Federal Reserve, confirm this. Comments from FOMC members and private economists suggest that a bigger potential threat to the economy and markets is the absence of inflation, which can so easily tip over into deflation, an insidious condition associated with recessions and worse.
Here is the take that economists at BNP Paribas had on the minutes:
"The description of inflation appeared surprisingly bearish. The March minutes noted that recent inflation developments had surprised FOMC members to the downside. 'A number of participants observed that the moderation in price changes was widespread across many categories of spending.' 'Large margins of underutilized capital and labor and a highly competitive pricing environment were exerting considerable downward pressure on price adjustments.' "
The BNP Paribas economists point out that the minutes do not indicate that further declines in inflation are in store. Still, the French bank's conclusion is that "inflation prospects appear skewed to the downside."
This will come as a surprise to many investors and market commentators, although it really shouldn't. As Against the Grain has pointed out before, consumer prices have been going nowhere for many months, despite concern that they would soar as a result of rising commodity prices and the kitchen-sink government programs intended to stimulate economic growth.
Those programs did cause a bump in the consumer price index about a year ago. It was offset, however, by the earlier destruction of so much wealth in the stock market, which has recovered considerably, and the housing market, which has not. The CPI in February, the most recent month for which it has been compiled, is about where it was in the middle of 2008.
Another piece of evidence this week highlighting the absence of inflation is the report Wednesday of an $11.5 billion drop - an annual rate of 5.6 percent - in consumer credit. The Wall Street consensus was for a $700 million decline. Less outstanding debt means less money in circulation, which translates into lower prices for things.
If inflation does remain subdued - more important, if investors realize that inflation remains subdued - it is likely to result in a continuation of the rally in the dollar, a development forecast here just before it began. Lower prices are also likely for commodities, especially gold, and for stocks, as companies find it more difficult to push up prices and therefore profits.