[hytem]

For some time now, I don't think inflation has had a lot to do with interest rates--more to do with the price of energy (oil) and "made in China." Almost everything except food these days in America is made in China or Asia, and this has helped greatly to keep inflation down and average Americans loaded with material goods. Food is also inexpensive here.The relatively low cost of oil (until recently) has also helped. If the price of oil stabilizes, I don't think inflation will be a problem, though higher transportation costs will increase prices. It's the cost of labor in China that will determine inflation here more than anything else. That will significantly effect prices of imports--which is why it's important for the Chinese to keep their currency cheap relative to the dollar.

As far as interest rates go, they have a much bigger effect on the economy. For example, when Greenspan raised rates in the summer of '00 , before the elections, the stock market collapsed(tech stocks were also badly effected by the Microsoft government investigation--which ended after the elections). Higher rates killed capital investment, and LC growth stocks still haven't recovered.

After the elections, in January, Greenspan lowered interest rates down to 1%, to get the economy going again. This cost the average CD/bank account owner thousands in dividends. Lower rates did, however, help the housing market greatly.

Through these extreme shifts in interest rates, inflation didn't change one iota--which was Greenspan's original cited reason for raising them. He didn't seem terribly concerned about inflation when he lowered them to 1%!

The current Fed chairman seems to be stuck in the same paradigm as Greenspan--juggling interest rates to control inflation. If he raises rates any more, he will damage the housing market, and that will hurt the economy. So, interest rates today have a much bigger effect on the economy, I think, than inflation.