Stop panicking about inflation.

• Author: Shenk, Joshua

On September 23, inflation was in the news. "This morning, the financial markets are preoccupied with inflation," trumpeted Neil Cabuto, host of CNBC's morning show, "Money Wheel." The Washington Post warned of an imminent "painful correction" as the Federal Reserve Board moved to raise interest rates. The New York Times reported a "scramble" on Wall Street, "apparently touched off by rumors that some Fed governors might not go along with the rate increase [italics added]."

On September 24, inflation was in the news once again. And on the 25th. And on the 26th. The truth is, inflation--or at least the threat of it--always makes good copy. And the 1994 stampede--led by Alan Greenspan and cheered on by economic commentators and business reporters--has kept it in the news. But this inflation hype is based on a false premise that has somehow taken a place in the economics orthodoxy. "In America today," The New York Times reported on October 2, "economic growth and inflation are intertwined, so that favoring brisk economic growth means tolerating a rising inflation rate."

Well, no. Economic growth does not always lead to higher prices, as a look at American history proves time and again. Between 1800 and 1940, the economy grew rapidly, but the wholesale price level was the same in 1940 as it was in 1800. And from 1954 to 1968, the country had nearly full employment, strong growth, and virtually no inflation.

Of course, inflation can be a real problem. But take a look at how it really develops in America and you can see how raising interest rates--which chokes off expanding businesses and new hiring--is the last thing we ought to be doing. The three periods of double-digit inflation since World War II--1946-47; 1973-74; and 1979-80--were all caused by real or perceived shortages of goods. So making it harder for industry to produce goods is insane.

The sane thing to do now is to stop speculating about what Greenspan is thinking, what the Fed will or won't do, and whether rates will rise or fall. If there is any danger of inflation--and there may be--its causes do not lie in the threat of a--horror of horrors--growing economy. They lie instead in two places where the business press and the banking experts have not bothered to tread: the continuing downsizing of American industry and a little-noticed, potential crisis in the oil supply.

Inflated Fears

This fall, if you really wanted to get a grip on how inflation could come back, you would have turned off "Wall Street Week" and "The Nightly Business Report" and paid close attention to what was happening in Flint, Michigan. There, you would have seen the outlines of a new problem in...