Now, a natural disaster that causes a contraction in supplies, as Katrina did with gas and gasoline, will cause an increase in prices. But that increase should be temporary and therefore not inflationary, precisely as Rex Nutting of DowJones MarketWatch says:
Inflation isn't a big one-time increase in gasoline prices, but a sustained increase in all prices. Individual price increases can only become inflationary if they are accommodated by consumers, businesses or the Fed.
Nutting has a telling quote: Goldman Sachs economist Andrew Tilton figures energy will sap about 0.5 to 1.5 percentage points from consumer spending this fall and winter, cutting the consumer's contribution to growth nearly in half. A particularly cold winter could siphon even more disposable income away from consumers, Tilton wrote in his weekly report to clients. "Such a shock would put the economy at high risk of recession," he said.
Not inflation, but recession.
Strangely, "Federal Reserve officials have rushed to the breach, vowing to keep raising interest rates as high as necessary to keep inflation at bay."
Now, recession and inflation are not mutually exclusive. The stagflation of the 1970s proves that depressed growth and inflation can occur simultaneously. And there is a risk of inflation.
But it's still puzzling. Why is the article headlined, "Katrina's blowback: inflation"?
Maybe because Marketwatch's real message is that Bush isn't to blame for the what happens to the economy?