With signs the recession is almost over and no end in sight to the government’s borrowing binge, inflation hawks are circling the market.
Well, they better keep looking, say skeptics of the inflation spike scenario.
"I think it’s blown entirely out of proportion," says economist David Jones of DMJ Advisors.
"Inflation is going to stay lower than expected for awhile," adds Ram Bhagavatula, managing director at the hedge fund, Combinatorics Capital.
Unlike in past recovery periods, inflation is unlikely to rear its ugly head anytime soon; in fact, it may be years before it becomes a legitimate threat to the economy.
Why? In a word -- demand.
"I think weak demand is the primary driver [in the equation]," says Bank of Tokyo-Mitsubishi economist Chris Rupkey.
So do many other economists.
"The strong driver of weaker demand is partly because consumers are on are a savings spree for the first time in 25 years," says A Gary Schilling, who runs his own consulting firm.
Economists note that consumer spending has been falling for months, even though income has been rising, partly because of stimulus plan tax cuts. High earners -- typically the big spenders -- are still feeling the pain of huge declines in stock and house prices.
"It is silly to worry about inflation when we are tackling serious questions about wealth loss," says Bhagavatula.
Demographics will play a hand in that because of the aging Baby Boom generation, says Maria Fiorini Ramirez, who runs her own consultancy MFR.
"Generally when people retire they spend less," she says.
What’s more, another key inflation ingredient -- wages -- are flat amid spiking unemployment. Some companies have actually cut wages for the first time in decades.
"Wages are 70 percent of the cost of production," says Jones, which will limit, if not prevent, price increases on the producer level, even if companies are tempted to pass along rising commodities costs.
Schilling adds that there is still a surplus of excess inventories, because "producers were caught flat footed" when the economy fell off a cliff after the collapse of Lehman Brothers last fall.
Given all that, Schilling is among those economists who say deflation, not inflation is still the "greater likelihood."
Japan’s decade-long recovery from the collapse of its asset bubble, which included massive government spending and borrowing, was marked by modest, yet nagging deflation and never unleashed inflation.
Recent data supports the deflationary concern. The consumer price index In March and April year-over-year declines -- the first in more than 50 years.
And though a lot of that reflected a sharp drop in energy prices from their record run of 2008, a broad array of goods and services has been showing declines.
That’s little consolation for inflation hawks, however, who point to the a doubling of crude oil prices in recent months and another worrisome decline in the dollar. There’s also the matter of rising market interest rates as investors demand higher yields on Treasurys because of the government’s growing borrowing needs -- as recent auctions indicate.
In the past, some combination of those factors has spelled trouble, such as in the late 70s and early 80s, which were fueled by the government’s borrowing boom of the 1964 -- 1973 period when it funded both Great Society domestic programs and the Vietnam War.
"Historically, it has taken ten years for inflation to take off," says Rupkey.
Nevertheless, such hyper-inflation has been the exception not the rule in the modern US economy.
And for now, it's too soon to say.
"The total lack of fiscal discipline on the part of the Obama administration when it side by side with a Fed giving us so much unconventional easing could in the future -- way down the road -- could give you that [inflation spike]," admits Jones.
Some economists expect GDP growth over the next decade to be lower than the last two-three decades -- averaging 2 percent. They are also somewhat dismissive of the oft-cited tell-take signs of trouble.
Bhagavatula says low interest rates are driving cash into he stock market rally, which should tell you something.
Jones calls the oil rally "a speculator’s binge."
Schilling expects the "Fed to be aggressive in pulling back" when the recovery takes off and expects the boom in domestic savings – he’s estimating $5.5 trillion over the next decade -- to finance a lot of the federal deficits.
So, keep those inflation expectations to yourself.
"Insane is a good word for it," shrugs Rupkey. "But that’s what the market does with these issues."