Will Inflation Make a Comeback? Renee Montagne talks to David Wessel, deputy Washington bureau chief for The Wall Street Journal, about the current outlook on inflation.
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Will Inflation Make a Comeback?

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Will Inflation Make a Comeback?

Will Inflation Make a Comeback?

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RENEE MONTAGNE, host:

The business news today begins with talk of inflation.

(Soundbite of music)

MONTAGNE: The latest consumer inflation figures were released this morning. After a sharp jump in January, inflation increased only a tenth of a percent in February. But with energy and food prices still volatile, and wages growing at their fastest pace in five years, there's also talk that inflation could soon turn into a problem. To find out why, we turn to David Wessel, Deputy Washington Bureau Chief for The Wall Street Journal.

Mr. DAVID WESSEL (Deputy Washington Bureau Chief, The Wall Street Journal): Good morning.

MONTAGNE: So what, David, could cause inflation to take off?

Mr. WESSEL: Well, any number of things could go wrong. We could have another spike in energy prices, unemployment rates could fall to the level where workers could finally begin to get some significant raises. There could be strong demand for goods and services that would make it easier for businesses that have been eager to raise prices, but haven't been able to do so, to finally raise prices. If any or all of these things happen, it could push the inflation rate up, and maybe even push it up higher than what the Fed considers price stability.

MONTAGNE: And what would determine, though, the point which inflation would become a problem?

Mr. WESSEL: Right now, inflation's running at roughly, by the official measure, at 2.5 percent a year, and that's in the manageable range. What would determine if it got worse would be worker productivity--the amount of output we make for every hour we work on the job--might not rise as much as it has been. That would mean that wage increases would be more likely to translate into price increases.

Another thing might be some declines in competition among businesses, perhaps because of trade barriers, perhaps because of mergers, any number of things. And finally, it really matters what people expect in terms of inflation. Price stability can become a self-fulfilling prophecy if everybody believes that prices are going to be stable.

MONTAGNE: Do you ever hear from your readers at The Wall Street Journal that the Consumer Price Index, the CPI, doesn't accurately reflect the inflation that they see all around them?

Mr. WESSEL: Absolutely. Every time I use the word Consumer Price Index or inflation in the paper, I get emails about that. And some of it is because people don't understand the way the index is constructed. The fact that it's an average, and nobody is average, or the fact that if you're paying college tuition or have high medical bills, you are experiencing a higher rate of inflation than the average in the country.

But the other thing, I think, is that people don't do a very good job of balancing out the ups and downs. When the price of something goes up, they say, ah-ha, that's inflation. When they get a deal on something, like a good air fare, because they shopped on the Internet, they don't see that as an offset--they say that's just because I'm a good shopper. So, people don't psychologically work the way the Consumer Price Index looks at things.

MONTAGNE: And just, finally, what would the fed do if it thought inflation was taking off?

Mr. WESSEL: If they thought inflation was really beginning to be a problem, they would just keep raising interest rates, in effect, to put a break on the economy, so that inflation won't get worse than it is right now.

MONTAGNE: David Wessel is Deputy Washington Bureau Chief for The Wall Street Journal. Thanks, very much.

Mr. WESSEL: Thank you.

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