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Overall inflation seems to be rather tame (about 2.5%) this year, but many commentators on the site and elsewhere have written that the


will need to keep raising rates to stave off inflation. Clearly, oil prices are higher and that is good for the oil sector, bad for the transports and limits discretionary spending by the consumer. Some commodities are certainly higher as well.

However, because our economy is less dependent on oil than in prior cycles/years (oil cost being a smaller percentage drag on the GDP) and because less discretionary spending by the consumer would create less demand and lower prices, couldn't high oil prices be neutral to inflation overall? Also, given that inflation is around 2.5%, isn't a neutral bias by the Fed somewhere around 3.5% to 4% interest rates?

It seems to me that with the jobs report and continued productivity gains, there hasn't been much of a soft patch. That may mean corporate profits and resulting hiring and capital expenditures are likely to be higher this year than expected by many right now. Maybe as the consumer slows down, the corporations finally (after four years) will pick us up. I am not positing that the economy will improve drastically, but 3% to 4% steady growth doesn't seem unreasonable or a reason to be as negative as many observers currently seem to be.

-- J.S.

Tony Crescenzi:

You probably are right about the notion that rising energy costs actually could dampen inflation in other goods.

One important ingredient that could make this possible is the Federal Reserve. If monetary policy is expansionary, then the Fed would be monetizing the rise in energy costs, thereby providing sufficient liquidity to boost the price of both oil and other commodities. If monetary policy is restrictive, then the rise in energy costs will sap consumers of their spending power and reduce the buoyancy of inflation on other goods and services.

I agree that the recent data on productivity suggest continued economic expansion. Importantly, the main ingredients for a sharp economic slowdown are not in place. Business inventories, for example, are near record lows relative to sales. The banking system is very strong. Corporations are flush with cash. Personal income growth is running one percentage point higher than the long-term trend. And household net worth is up $20 trillion since 1995, a gain of roughly 80%.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of

The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;

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