Economy trumps fears of inflation-for now

Inflation nearly disappeared in January for the first time in 50 years, with only a slight rise in the Consumer Price Index
saving the country from deflation.

Rising prices are hardly a concern now, as the depressed auto and real estate sectors can attest. But economists fear inflation
might pose a threat as early as next year.

"It’s almost inevitable that we’ll see some," said Michael Hicks, director of Ball State University’s Center for Business
and Economic Research. "It’s the magnitude that could be the problem."

Inflation might shoot to 10 percent, Hicks predicted — a level not seen since 1981.

Driving the anxiety is the billions of dollars of federal spending unleashed to revive ailing banks and the overall economy.

Inflation is typically caused when the supply of money outstrips economic growth, which almost is nonexistent now.

The Federal Reserve Bank said earlier this month that the economy won’t gain steam until late 2009 at the earliest. If it
begins to recover next year, and financial institutions start lending, inflation could start climbing, said Morris Maurer,
president of the National Bank of Indianapolis.

"I think there’s a probability that that will happen," he said.

Inflation concerns are so great that legendary investor Warren Buffett predicted in his annual letter to shareholders late
last month that the federal bailouts will reap an "onslaught of inflation."

Others aren’t so sure. Jerry Conover, director of the Indiana Business Research Center at Indiana University, is skeptical
of the gloomy forecast. The center predicts inflation won’t exceed a comfortable 2 percent through most of next year.

"At this point, I don’t think the prospects for inflation are very high," Conover said. "The depth of the recession activity
continues to really slow down spending and demand."

If inflation were to rise, the Federal Reserve Bank probably would fight it by raising interest rates.

Currently, the federal-funds rate — the interest banks charge one another — is 0 percent to 0.25 percent. Banks’ prime lending
rate, the benchmark for consumer and business loans, is 3.25 percent.

The Fed has kept rates low in recent years because inflation was tame. And in the past couple of years, the Fed wanted to
avoid aggravating the economic downturn.

If inflation rises above 5 percent, the Fed will likely raise interest rates and crimp consumer spending, and ultimately damage
the economy, said Bill Rieber, an economics professor at Butler University.

Soaring inflation in the early ’80s prompted the central bank to push interest rates into the 20-percent range. However, the
action triggered a recession that rivals only the current economic crisis as the most severe since the Great Depression.

If banks shed some of their fears about the economy and begin lending at a steady rate, inflationary fears will soften. But
if the spigots turn wide open and loans gush, and stock market and employment numbers shoot up, inflation is bound to rise.

"Far-fetched as it may seem, you can make a strong case that interest rates, especially long-term rates, will rise," Maurer
said.

For now, inflation prospects are masked by greater concerns, particularly job loss.

Joblessness should begin to drop this summer as recipients of the stimulus money spend it and begin putting people back to
work, Ball State’s Hicks predicted. Much of the activity will be in construction, where workers would command higher wages
because of high demand.