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May 26, 2011. Copyright © 2011 New Geography

It's been more than three years since the Great Recession began, and it's no longer debatable that the federal spending in its wake did not provoke inflation. Years of forecasts by fiscal conservatives about the result of government expenditures have proved to be wrong. After three fiscal stimulus packages, core inflation—which excludes the volatile prices of oil and commodities—remains very much in check. The core rate is the most reliable guide to future inflation, and it has not trended upward.

Headline inflation, however, the rate that does include these two, has increased. Is the recent uptick in gas and food prices a game-changer on inflation? Does it mean that predictions of an inflation tsunami were well-founded? And what's the best course to follow now?

Many commodity prices have made double and triple digit gains over the past year. The changes are more than a blip—cotton futures, for example, have risen 162 percent—even if the cost of oil continues to decline. These prices are notoriously subject to rapid change for reasons that don't reflect the structure of the U.S. economy. Factors can include Middle East politics, weather, activity in the developing world, and, most significantly today, speculative profiteering.

Gold and other commodities have become a hot destination for players—money managers—as these markets have become the rare opportunity for high returns. In the absence of federal regulation and supervision, the low interest rates that are so crucial to business growth and to the vast majority of Americans have been allowed to feed into the permissive speculative superstructure.

The run-up has clearly impacted the poor and the hungry in the undeveloped world. In academic and policy circles, there's a high level confidence that commodities account for only a small share of GDP in wealthy countries, and so aren't of concern as long as core inflation is under control. At the Levy Institute, in contrast, our research shows that even in the developed world expensive food, energy, and materials can crowd out other household purchases. Consumer budgets can be hurt even before serious headline inflation appears.

If commodity prices were to continue to climb broadly and sharply, the Federal Reserve could face the prospect of a serious episode of cost-push inflation, similar to what we saw in the 1970s and '80s. Fed Chairman Ben Bernanke might find himself occupying the chair of Paul Volcker in more ways than one.

This kind of inflation is caused neither by the effects of low interest rates on the broader economy, nor by government spending. And, as with any symptom of ill health, the cause dictates the appropriate treatment. So if Bernanke's response was to raise interest rates dramatically in the hope of abating inflation to some arbitrarily low target, it would be a risky mistake. An interest rate rise would be a serious danger to growth and job creation. Business and labor are far too fragile to deal with a double whammy from rising gas and food prices coupled with monetary policy tightening.

A better response would be "watchful waiting," a phrase seen in the December 1996 minutes of the FOMC (Federal Open Market Committee) meeting. A commodity price inflation could remain at least somewhat isolated.

Higher commodity prices will be used as an excuse to charge that the Fed's supposedly lax policy has unleashed an inflationary flood of cash throughout the economy. But the Fed's so-called "easy money" is parked at the Fed itself, as bank reserves, since banks are not lending. This can't cause inflation either. Logic hasn't stopped newly re-branded Republican presidential candidate Newt Gingrich, who recently admonished that "The Bernanke policy of printing money is setting the stage for mass inflation."

Those who purchase securities for long-term investment evidently disagree. Bond traders aren't anticipating an inflationary surge. Just look at the yield spread between inflation-indexed and non-indexed Treasury securities of the same maturity. It has remained almost constant over the past year. In other words, buyers who want their returns insulated from inflation are paying only slightly more for protection than they were last year. That flatness—the unwillingness to pay a premium for inflation insurance—indicates that long-term bond buyers haven't revised their inflation forecasts.

Also unlikely to revise their predictions: inflation doom-drummers, even as energy prices level, and wages, another inflation indicator, are by no means jumping. Like eons of "the-end-is-nigh" prognosticators, they don't exactly have a great track record. Back in spring 2008, a frenzied Glenn Beck urged Fox viewers to "Buy that coat and shoes for next year now." Some of his Washington cohorts are coy about inflation's estimated time of arrival. Republican House Majority Leader Eric Cantor, for example, tells us that "fears" of "future" inflation are "hanging over the marketplace." Others, like former Pennsylvania Senator Rick Santorum, say it's already arrived (Obama brought it). The accusations continue despite a lengthy stretch of the lowest inflation rates in modern US history, even with the current commodities rise.

Paul Ryan (R-WI) has been hailed as both a truth sayer and a soothsayer on the economy. He recommends that the Federal Reserve raise interest rates now to head off inflation "before the cow is out of the barn," ignoring the pain this would cause families and businesses. Here's my recommendation: Don't trust predictions about the future from those who've misread the present, and been very wrong in the past.

Dimitri Papadimitriou is President of the Levy Economics Institute of Bard College, and Executive Vice President and Jerome Levy Professor of Economics at Bard College.