Things are panning out as expected -- as far U.S. economic growth prospects are concerned. At the same time, there are legitimate, creeping, worries that there will be upside surprises regarding inflation, later in the year. As we pointed out last week, barring a sharp and sustained increase in energy prices, there is little likelihood of a surge in inflationary pressures. We noted that the policy framework has not deteriorated inordinately, to make a spiral possible. Nevertheless, the risk of an uptick in inflation, before the year is out, has indeed increased. There are a number of factors involved: (a) the current easy stance of the Fed, (b) the rise in commodity and energy prices, (c) the possibility that productivity growth may be weaker than expected, (d) the need for corporations to raise prices to help the bottom line, and (e) a possible slip in the value of the dollar. Counteracting forces are in the form of excess capacity and intense price competition.
