So, who's afraid of inflation?
Apparently the US stock market, the US bond market and global currency markets, which all trembled before the US GDP data released Thursday showing an annualized inflation rate of 3.2% in 2004:I for personal consumption expenditures, the fastest clip in three years. After a decade or so of quite low inflation, particularly under Bush, 3.2% seems like a mountain.
But is it? In 2003:I inflation by this measure hit 2.8% and in 2002:II at 2.9%, falling dramatically the next two quarters in both instances. Big spikes in energy prices drove each of these updrafts (69.3% and 65.2% respectively), while moderating prices afterwards eased them. This time around, it is true, core inflation is a bit higher, but not much so.
Global inflation in raw materials, including oil, has been partially driven by stunning growth in Chinese consumption. For example, China is now the world's #2 oil importer after the US but now before Japan. With the Chinese central bank determined to clamp down on loans in an effort to begin cooling the country's red hot economy, pressure on energy prices should ease as well. Considering US consumption growth is still being driven by toxic sources rather than wages and salaries, the future of inflation -- in the General's humble view -- is dim indeed.
UPDATE: For more smart commentary on China's cooldown and its global implications, see Stephen Roach today: "Trouble brewing in Asia".