tMichaelB is the web site for Tom Bengtson, who writes about business, religion, family and politics.

Tuesday, February 14, 2006

Inflation? It depends on who you talk to

Are we in an inflationary economy? The answer depends on whom you talk to. I recently talked to two economists who have completely different views on that question. Stephen Happel, an economics professor at Arizona State University, told me last week that the economy is booming and the Federal Reserve Board needs to raise rates to hold the line on inflation. Alan Polsky, an economist with the Minneapolis investment firm of Dougherty & Company, told me last Saturday there is no inflation in the economy and that he doesn’t expect any inflation in the coming year.

Happel said the consensus among Blue Chip economists is that 2006 will see GDP growth of 3.4 percent. A drop in capital expenditures and government spending contributed to a GDP figure of 1.1 percent for the fourth quarter; Happel said he expects a bounce in the first quarter of this year that could put the rate at 5 percent.

“Things are growing, growing, growing,” Happel said. “The biggest problem facing the country now is inflation.”

Happel predicted the Federal Funds rate will go to 4.75 percent or 5 percent. (It is 4.5 percent now.) New Federal Reserve Board Chairman Ben “Bernanke is an inflation fighter,” Happel said. “He will fight inflation. He is not going to let the legacy of Greenspan and Volcker go down the tubes.”

Polsky’s outlook was more sedate. “We really don’t have inflation now and I don’t think we are going to see of lot of inflation in the economy over the next year or so,” Polsky said. Rising prices in some areas are not having the inflationary affect one might expect, he said.

While energy prices are high, he said airlines and landlords are in competitive situations that prevent them from passing those rising costs onto consumers, thereby deadening their inflationary affect.

Polsky said he also expect the Fed Funds rate to go to 4.75. “If they push to 5 percent, that could be too aggressive,” he said.

Polsky commented that the yield curve is “too flat,” and said it indicates that the Fed Funds rate is too high.

Happel noted general migration trends across the country where recent college graduates and retired people are moving from the Northeast and Midwest to the West Coast and Southwest. These population cohorts are the largest in the country, and they are made up of people who typically spend more than anyone else. Happel said he is seeing the consumer confidence and accompanying spending first hand. He said this helps explain why Western economists tend to see inflation and a booming economy while Wall Street economists tend to see less compelling economic activity.

“I am anticipating this to be a boom year,” Happel said. “I see big spending, very strong consumer spending and the creation of two million jobs. This will lead to a rise in income.” Happel said he expects to see GDP growth around 4 percent this year. While he said he “hopes the Fed continues to raise rates to wring out inflation,” Happel said he expects the yield curve to remain flat.

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