The U.S. economy's strength has prompted speculation that it is a "new economy," in which information technology boosts productivity and cuts margins, allowing high growth, low unemployment and almost no inflation. Academics are arguing over the validity of the theory, but among its adherents is Mr. Alan Greenspan, the chairman of the U.S. Federal Reserve Board. Markets read his acceptance of the theory as an indication that the Fed is less concerned with inflation -- its traditional bete noire -- and have roared ahead accordingly, since inflation fears trigger interest-rate hikes, which in turn put the brakes on business expansion.
The bulls received a bit of shock, then, this week when the Federal Open Market Committee announced that it was shifting its "policy bias" toward inflation. The significance of the move is uncertain. On three previous occasions, the FMOC has made a similar announcement and only once were interest rates raised -- a full year later. Normally, however, the "bias" decision is announced six weeks after it is made; this time it was released immediately. That implies, at least, that the Fed is signaling markets that the inflation bugaboo is not dead. Talk about the "new economy" only goes so far.
The Fed's concern was prompted by inflation figures released last week that showed consumer prices increasing 0.7 percent in April, the largest climb in seven years. The key factor was an increase in gasoline and tobacco prices. Economists are not sure whether it is a one-time climb or the long-awaited eruption of prices bottled up throughout the eight-year boom.