Fear of Soaring

Consumer Reactions Are the Main Worry

Consumers can't be blamed for feeling grumpy. With prices rising and interest rates creeping up, bargains are harder to come by and it's too late to land a 30-year fixed-rate mortgage anywhere close to 5 percent.

But should they be nervous? Are we getting close to some tipping point, when costs start to spiral?

As in the 1960s, war costs are helping to swell the budget deficit. As in the 1970s, turmoil in the Middle East is pushing up oil prices. As in the 1980s, interest rates are headed higher.

Remember those days: 13 percent inflation and 30-year mortgages at 18.5 percent. It took nearly 5 percent of a family's annual income just to fill up the car with gas.

Economists say there's no need to hyperventilate yet. Interest rates and inflation are still tamped down near their lowest levels in decades. Today's economy is structurally very different, and policymakers have learned from the mistakes made back then.

Still, an arched eyebrow could be forgiven.

"The dynamics of the inflation process are not well understood," Federal Reserve Bank of Philadelphia President Anthony M. Santomero said in a speech Tuesday.

"The economy rarely, if ever, evolves as smoothly as we forecast," he said. "Its dynamics are complex and events we cannot now foresee will undoubtedly come into play."

One of the biggest sources of unpredictability going forward is the consumer. Consumer spending accounts for two-thirds of the nation's economic activity, so consumers' reactions to rising prices and interest rates will have great economic effects.

If they just accept price increases, that could encourage businesses to raise prices further. If they cut way back on spending, economic growth could stall.