Why isn't everyone concerned about inflation?

I have no doubt that Paulson and Bernanke are brilliant and are making the right decisions to restore confidence in the financial system. However, I think that we will see significant inflation in 2009 that will dramatically impact US consumers and this should get more attention now.

First, a common misperception is that when the Fed lowers rates, it just declares such a change and markets respond. The Fed actually pumps money into the financial system to such a degree that the "price" of money (all that interest rates really are) falls to the target rate.

Second, the US government is running two huge deficits that you could think of as a balance sheet and an income statement. We are spending more than we are bringing in (or in other words, taxes are less than government expenditures) and we are growing our share of debt to cover this. The rest of the world, particularly China, have been happy to support our debt habit, but recent events have shaken confidence and it is only because other countries are in similarly dire straits that investors have held tight.

Third, to cover the requests to support ailing industries and struggling consumers, the government will need to keep flooding the markets with capital, taking on more debt to finance this. One easy way to minimize the impact of this debt is inflation, which decreases the future value of money and as such enables debt repayment with "cheaper" money. As an example, if you can borrow $100 to buy a watch today at a 5% interest rate, then see inflation (and hopefully wages) grow to make that watch cost $1,000 next year, you could sell your watch, repay the $105 you owe, and pocket $895 dollars. The money you repay the loan with has been devalued so that the debt becomes a much less significant burden.

The US consumer base is the strongest in the world by a long shot, but GDP growth hs slowed and we are likely in recession now. Increasing the supply of money despite slowing economic activity creates a supply and demand imbalance, driving inflation. I don't expect another 1920's Germany (http://en.wikipedia.org/wiki/Hyperinflation) because with Volcker at Obama's side, the Fed will likely take firm action to abate the problem before it spirals out of control. However, this will require significantly higher interest rates within the next few years, as money is sucked from the financial system to quell inflation.