Some Fear Inflation Is Ready for a Comeback
JIM PAULSEN, the chief investment officer at Wells Capital Management, ticks off the ingredients needed for a mean batch of inflation.</br></br>"I would flood the system with money far in excess of economic growth, I would take interest rates to the lowest levels possible, I would have the government spend like a banshee, I would drop the value of the dollar, and finally I would take any capacity growth or additional supply growth and stop it," he says. As a garnish, he'dadd rising commodity prices and a growing trade deficit mixed with some rising trade tensions.</br></br>Sound familiar? As investors close the books on 2003 and look out into next year, some are worrying that inflation, which had been banished in the past few years, is poised for a comeback. Were that to happen, it would terrify bond investors and shake up the stock market, while giving a boon to some manufacturers, which finally would be able to raise prices.</br></br>"Last fall we were all worried about deflation," says Mr. Paulsen. "What could happen by summer is everyone could be panicked about inflation."</br></br>That panic may be based more on emotion and expectations than on anything else. There are lots of good reasons why inflation should remain tame, mainly the lack of a strong jobs market. But as investors spend much of their time trying to divine the future, expectations are what will drive stocks and bonds.