Is Inflation Really a Threat? Experts Say: Fugheddaboudit

Inflation? Fugheddaboudit.

With signs the recession is almost over and no end in sight to the government’s borrowing binge, inflation hawks are circling the market.

Well, they better keep looking, say skeptics of the inflation spike scenario.

"I think it’s blown entirely out of proportion," says economist David Jones of DMJ Advisors.

"Inflation is going to stay lower than expected for awhile," adds Ram Bhagavatula, managing director at the hedge fund, Combinatorics Capital.

Unlike in past recovery periods, inflation is unlikely to rear its ugly head anytime soon; in fact, it may be years before it becomes a legitimate threat to the economy.

Demanding Arguments

Why? In a word—demand.

"I think weak demand is the primary driver [in the equation]," says Bank of Tokyo-Mitsubishi economist Chris Rupkey.

So do many other economists.

"The strong driver of weaker demand is partly because consumers are on are a savings spree for the first time in 25 years," says A Gary Schilling, who runs his own consulting firm.

Economists note that consumer spending has been falling for months, even though income has been rising, partly because of stimulus plan tax cuts. High earners—typically the big spenders— are still feeling the pain of huge declines in stock and house prices.

"It is silly to worry about inflation when we are tackling serious questions about wealth loss," says Bhagavatula.

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Demographics will play a hand in that because of the aging Baby Boom generation, says Maria Fiorini Ramirez, who runs her own consultancy MFR.

"Generally when people retire they spend less," she says.

What’s more, another key inflation ingredient—wages—are flat amid spiking unemployment. Some companies have actually cut wages for the first time in decades.

"Wages are 70 percent of the cost of production," says Jones, which will limit, if not prevent, price increases on the producer level, even if companies are tempted to pass along rising commodities costs.

Schilling adds that there is still a surplus of excess inventories, because  "producers were caught flat footed" when the economy fell off a cliff after the collapse of Lehman Brothers last fall.

Given all that, Schilling is among those economists who say deflation, not inflation is still the "greater likelihood."

CONTINUED : A History Lesson

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