Insider Q&A: Economist Joel Naroff on the inflation threat

WASHINGTON: Inflation, a no-show for decades, is suddenly breaking out all over, it seems. And concerns are growing.

Consumer prices in April jumped by the largest amount in more than a decade, with surging costs for food, used cars, airline tickets and furniture, among other goods and services. The price increases have sparked fears that the quickening economic recovery could trigger runaway inflation for the first time in a generation.

The Associated Press spoke recently with Joel Naroff, president and chief economist of Naroff Economics LLC. The interview was edited for clarity and length.

Q: After many years of low inflation, are you seeing signs that inflation is rising?

A: There is no question that inflation pressures are building, and they are building fairly sharply. We have had a massive intervention in the economy by the U.S. government. That has caused a snapback in demand at the same time that global supply chains are having problems.

Q: Chairman Jerome Powell and other Fed officials are arguing that the price increases are transitory and not an indication that inflation will become a problem. What do you think?

A: I think we have a greater risk that this will be an extended period of inflation rather than a transitory period. The Fed is expecting the risk to fade as the government support winds down. But if President Joe Biden's infrastructure and family programs are passed, the Fed could be in trouble.

Q: The Fed says it has the tools to deal with inflation.

A: They can always raise rates. But they have also created an economy where the expectations are that the Fed will keep rates extraordinarily low for an extraordinarily long period.

Q: The Fed seems to be in a new era where instead of promising to hike rates pre-emptively to fight inflation, it is willing to wait longer to push unemployment down farther and to let inflation run above its 2 per cent target for a time.

A: We used to have the saying that if the Fed waits until it sees the whites of the eyes of inflation, it has waited too long. Now, we have a Fed that is willing to be overrun by inflation before it even starts firing.

Q: Where are consumers most likely to notice higher prices?

A: Prices will be going up everywhere. I think you will see it in restaurants, in amusement parks, in move theatres. They are all going to be raising their prices. The cost of building a new home has gone up so much. It's not just lumber but everything.

Q: Are there any specific cautions you would give to investors?

A: The biggest issue I see is, we don’t know what will happen to the economy once the government support to households and businesses stops. Investors should be asking that question right now.