Fear of Soaring

Fed officials, who try to stabilize the economy by targeting certain short-term interest rates, are watching consumer spending closely. Even officials with very benign views of the economy's probable course worry that if consumers and businesses expect more inflation, those expectations will fan price increases. So the Fed is conducting a campaign to assure the public that it is on the case and will not let the inflation genie out of the bottle.

Some Fed critics, however, believe the bottle is already uncorked. They point to recent rises in prices for energy, steel, lumber and other raw materials as developments that will force businesses to raise the prices of cars, appliances, houses and other products -- if consumers will accept them. And while overall inflation is very low, these critics worry that consumers already expect more price escalation because many household expenses have spiked. Think gasoline, food, health care, tuition, cable bills and houses in many markets.

On the whole, Fed officials depict the economic outlook for the coming year as generally sunny. Several have said recently that they expect the economy to continue to expand strongly, job creation to build steadily and inflation to remain tame.

While the Fed is getting ready to start raising short-term interest rates to prevent inflation from blasting off, policymakers have said they will be able to do so very gradually because inflation is still so low -- around 2 percent. By contrast, when the Fed launched a campaign to throttle inflation in 1979, it was already above 13 percent.

A bit of history may help to understand why the Fed is optimistic that it can navigate these tricky waters and bring the economy into a long, healthy expansion.

One cause for comfort is that the U.S. economy today is far more stable -- that is, less prone to bursts of high inflation and swings into deep recessions -- than it was in the 1970s and early '80s.

Since then, inflation dropped from a high above 13 percent in 1979 to a level so close to zero last year that Fed officials worried about the possibility of deflation -- a potentially damaging fall in the overall price level -- and are relieved today that it has edged up from such dangerous territory. (Inflation may be bad, but deflation can be worse. Think Great Depression.)

Recessions in the past two decades have been shorter, shallower and less frequent.

The nation lived through four recessions, covering a combined 49 months, between December 1969 and November 1982. The unemployment rate soared as high as 10.8 percent during the recession of 1981-82.

By contrast, the period since then has notched only two recessions that lasted a combined 16 months. During those contractions, the jobless rate went no higher than 7.8 percent.