Rich Lowry

Beneath the headlines of Wall Street's financial crisis lurks the economic killer for ordinary Americans -- inflation.

It steals from the pocketbook of every American consumer, in an across-the-board regressive tax hitting especially hard those who spend most of their income on food and energy. It cuts into profits and washes away savings. And it has a self-perpetuating dynamic -- once people become habituated to inflation, it's devilishly hard to stamp out.

During the past year, the Consumer Price Index -- the so-called headline inflation rate -- has increased more than 4 percent. The Producer Price Index, measuring wholesale prices, is up more than 6 percent, and the price of imports is up 14 percent -- both at their highest rate in 20 years. The dollar is its weakest since 1971, a national embarrassment.

This is an economic environment that the Federal Reserve helped create. It fought a phantom deflation in 2002-2003 by cutting the federal funds rate to 1 percent and keeping it there for a year, blowing hot air into the credit and real estate bubbles. Now that those bubbles have burst in spectacular fashion, the Fed is trying to forestall or minimize a recession with more rate cuts.

In effect, the Fed is creating more dollar bills, and thus depreciating their value. This isn't the sole cause of price increases. An ill-conceived ethanol program has driven up food prices, and global demand is bidding up the price of oil. But oil wouldn't be at $100 a barrel if the dollar weren't so weak. The Fed's rate cuts benefit Wall Street by lowering the cost of borrowing and potentially homeowners with adjustable-rate mortgages, but at the cost of everyone else who wasn't improvident in business dealings or home-buying.

Lower- and middle-income people bear the brunt. An analysis by The Washington Post found that prices for staples like groceries, gasoline and health care have risen 9.2 percent since 2006. According to its calculation, this price increase cost a middle-class family an extra $972 annually. Merrill Lynch says a greater proportion of consumers' disposable income went to paying for such staples -- 36 percent -- than at any time since the figure was first tracked in 1960.

Historically, countries saddled with a debt problem are tempted to inflate their way out of it, although it's an expedient more associated with Latin American basket cases than the United States of America.

Rich Lowry

Rich Lowry is author of Legacy: Paying the Price for the Clinton Years .
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