Date posted: August 13, 2012
The Federal Reserve has more than tripled the money supply in the last four years. This has raised concern for much higher inflation rates down the road. But N.C. State University economist Mike Walden says people in the financial markets don’t seem to be worried.
“Well we don’t seem to see a worry … expressed in the financial markets. Now what do I mean by this? Well, if we look at certain kinds of investments, people investing their money particularly for the long run, the interest rate that people will accept on those investments will have an inflationary component. Simply stated, if you expect inflation to be a lot higher, say, five years down the road and you’re investing your money over five years, you’re going to need to have a higher interest rate to incorporate that higher inflation rate, because inflation depreciates the value of your dollar.
“What we have seen in those long-run interest rates thus far is not any indication that investors are concerned or expecting a much higher inflation rate again down the road. So despite the fact that we’re seeing some increase in inflation now due to higher food prices, gas prices seem to have turned, we don’t see that incorporated right yet into an expectation of much higher long run inflation.
“Now this could be for two reasons: One, it could simply be that people think that the higher costs we’re experiencing now are temporary — gas, food. Or secondly, there is a concern that all the money the Federal Reserve has printed may spark higher inflation. The investors may feel as if the Federal Reserve can pull that money back in the future when they feel the economy is on its feet.
“So inflation’s always a concern, but right now people who are betting their money and betting that expecting inflation are not yet expecting a much higher inflation rate in the future.”
Category: Economic Perspective