Is the threat of inflation in the eye of the beholder?  The St. Louis Fed's Kevin Kliesen has a new analysis of the potential threat of Inflation.  Kliesen suggests that it is important at this stage--the post recession period--to determine how big a threat inflation is to help steer Fed policy.  But in his analysis, he highlights how complicated this is, and he looks at how wide ranging opinion on the threat of inflation can be:

A considerable amount of disagreement seems to exist among economists about the inflation outlook over the next few years. Some economists are quite worried about the potential for much higher inflation, while others are more concerned about the potential risk of inflation falling to uncomfortably low levels—or even the possibility of deflation (a fall in the aggregate price level). Much of this disagreement reflects, on the one hand, the Federal Reserve's aggressive response to the deep recession, the financial crisis and the exceptionally large federal budget deficits, and on the other hand, the downward pressure on wages and prices that typically occurs in the aftermath of a deep recession.

Figure 2 depicts one way to gauge this disagreement. In Figure 2, the history of the Blue Chip forecasts of the average Consumer Price Index (CPI) inflation rate over the next five years is presented. The chart shows the average of the least optimistic inflation forecasts and the most optimistic inflation forecasts, as well as their difference (disagreement). During periods when inflation tends to be relatively high and variable, such as the late-1980s and early 1990s, there tend to be some sizable differences among forecasters about the medium-term inflation outlook. By contrast, during periods when inflation tends to be relatively low and stable, such as the mid-1990s to mid-2000s, forecasters tend to disagree less about the inflation outlook. Since early 2007, though, the level of inflation disagreement among forecasters has increased.

Here is the figure to which Kliesen is referring:

The blue line is the difference between the average projection for CPI inflation by the least optimistic and the most optimistic forecasters. 

Read Inflation May Be the Next Dragon To Slay here.  And watch Kliesen discuss the threat of inflation in this interview: