Early Signs of Inflation

New Commerce Department numbers out today show that inflation is starting to be felt. While core inflation is at comfortable annual rate of 1.3%, prices for energy and food are up over 18% in the past year. These figures show that the economy is starting to rebound, but the dollar might be losing some value thanks to the government's expansionary fiscal and monetary policies. Even though the core numbers are not at dangerous levels, overheated prices for energy will slowly filter through the economy and force the cost of other goods to increase - thus fueling additional inflation.

Another potentially dangerous statistic released showed that consumer spending increased faster than income while the savings rate decreased. This demonstrates that people might be reverting to spending based more on credit than earnings, a problem which was a major cause of the recent recession. Additionally, there might be mixed results of individuals saving at a lower rate. This could be a bad sign as it means that less money is available for investment, but it might be good as companies will be able to sell more goods and services.

Effects of inflation might cause an economic recovery to become toxic if not monitored closely. With so much money pumped into the financial system in the last three years, the value of the dollar can be endangered. The funds should be carefully pulled out so that dangerous of rising price levels are averted. The easy money also can make it possible for individuals and companies to again over-leverage themselves and repeat the recent experience.

The Federal Reserve should act decisively to defend the value of the dollar while concurrently acting to prevent the abusive use of credit. By allowing excess cash, used to prevent a collapse, to remain in the system the Fed is risking a devaluation of the dollar. They should slowly raise their interest rates and attempt to mop up some of the vast amounts of excess liquidity pumped out over the last three years.