The boogey man is in the closet…….many economists are debating whether we will have inflation or deflation……who is right?

CNN Money is reporting that some fear inflation while others fear the opposite.  Which will it be?

Should the Federal Reserve be more worried about the threat of inflation on the long-term horizon, or deflation in the short-term?

Those who fear inflation argue that the recent rise in oil prices, the dollar’s loss of value and the recent rise in yields on U.S. Treasurys are all signs that consumers could soon be grappling with higher prices for lots of goods and services.

These economists say the seeds for inflation have been sown by the Fed’s extraordinary efforts to keep the economy afloat over the past year.

But others argue the economy is still so weak that deflation, or a drop in prices, is the more serious threat. The Consumer Price Index, the government’s key inflation measure, posted its largest 12-month drop since 1950 in May.

This year-over-year decline in prices, coupled with rising unemployment and low factory utilization, could be signs that prices are likely to keep falling. And while lower prices might sound like a positive to consumers with budgets stretched to the breaking point, economists are in general agreement that deflation is far more destructive to the economy than inflation.

Businesses unable to make a profit in an environment of declining prices will likely cut production and lay off more workers. That could cause a deflationary spiral. The Great Depression and Japan’s so-called Lost Decade of economic stagnation are both well-documented examples of the damage that deflation can cause.

When the Fed wraps up its two day policy meeting Wednesday, it is virtually certain that it will leave its key interest rate near zero. What will be watched more closely is whether its statement has language warning of greater risk from rising or falling prices in the future.

In its last statement, the Fed said it “expects that inflation will remain subdued.” It also rang a deflationary warning bell, indicating that “inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”

I know…I know……so what will it be , Professor?

Back in the “dark ages” of my investing there was a sure sign of approaching inflation, that was the price of gold…if it went up then inflation was expected and investors were trying to get ahead of it.  At last I saw gold was at $900+ per ounce.  Take that for what it is worth.