"Some Fear Inflation Is Ready for a Comeback," or so says the headline of a Wall Street Journal story by Ken Brown. Only six months ago, I felt obliged to debunk deflation scares that were in vogue at the time. Now we are suddenly being urged to worry about inflation. Do things really change that quickly, or do journalists just have to keep discovering something new for us to worry about?

As with the deflation scare earlier this year, the inflation stories in the popular press don't hold up too well on close examination. The Wall Street Journal's version mainly relies on veiled theories about inflation. A table of statistics includes only the lowest measure of inflation, the core CPI. And any figure about past inflation tells us little about the future. Inflation is always lower before it moves higher. Other numbers in the table would be informative only if some theory could link them to inflation.

One theory relies on a syllogism: "If the Federal Reserve shares that view (about a strong economy being inflationary), it will push up the federal funds rate, which ... could slow or stop the recent economic rebound." The first premise is that strong economic growth causes interest rates to move higher. The secondary premise is that higher interest rates cause weak economic growth. Accept both premises, and your conclusion must be that strong economic growth causes weak economic growth.

To avoid that paradox, scrap the second premise. Real interest rates always move higher when real GDP speeds up and lower in recessions. Real interest rates are what is left after subtracting inflation, so it is wrong to treat every increase in interest rates as evidence of inflation.

Brown says, "If the Fed starts to jack up interest rates ... (investors) will sell stocks. That's because with interest rates higher, stocks will look less attractive." Less attractive than what? Not less attractive than bonds. If interest rates move higher because a strong economy creates more profitable business opportunities, then the rise in earnings will far outweigh any decline in the ratio of stock prices to earnings. The economy often moves the Fed, rather than the other way around.

A bond trader is quoting fearing a 2.5 percent fed funds rate by the end of 2005. I'm sure the fed funds rate will be higher than that next year, but that is right and good. If the Fed tried to keep the interest rate on bank reserves below 2 percent during a time of vigorous economic activity, they would have to buy gobs of Treasury bills and create new bank reserves to pay for them. Judging by past behavior, the Fed is more likely to slowly adjust the fed funds rate to keep pace with the year-to-year trend of spending -- nominal GDP -- which is already above 5 percent.

Brown says, "A period of weak growth, which would keep inflation in check, is possible." If the economy is strong, we will get higher inflation and interest rates and end up with a weak economy. If the economy is weak, we start with a weak economy. Either way, the economy can only be weak. This theory cannot even begin to explain how China mixes real economic growth of 9 percent with inflation of 1.8 percent.

The article mentions some facts: "So far, the market has shrugged off the declining dollar, rising commodity prices and big budget and trade deficits because the jobs market, until recently, was so weak." The idea that the stock market "shrugged off" warnings of inflation presumes the stock market goes down if inflation goes up. Ironically, The Economist was apoplectic in urging the Fed to tighten in the late '90s because stock prices were soaring. But stocks do suffer with serious inflation, which means inflation risk was low in the '90s and it is still low today.

The broad dollar index was around 116 in late 1999 when the Fed started raising interest rates, rose before and during the recession, and was back down to about 116 by late November. Whether the dollar is up, down or sideways depends on where you start. In any case, the post-recession decline of the dollar is relevant only to the extent that it might have inflated the prices of imports. In October, the yearly increase in import prices was only 0.9 percent, and even lower without oil. Continued...