Wholesale inflation took an unexpected leap in January 2009.  Today, the Labor Department said that wholesale prices increased by 0.8% last month.  This represents the largest increase since last July and well above economists expectations of a 0.2% increase.

So, why does this economy need some inflation (some being the key word).  Our economy is driven by consumer spending.  We earn income and then we spend it at an alarming rate.  However, during this recession, consumer spending has all but dried up.  This is partially due to the freezing of the credit markets, but also due in large part to consumer expectations and confidence.  Americans are “on the sidelines” waiting to see what happens before they get back into the spending frenzy.  Why buy today when it will be on sale tomorrow?  What inflation does is add a little urgency to the equation.

If consumers anticipate that things may be more expensive if they wait, they will act sooner.  In the real estate world, investors have been sitting idle because they feel that prices are declining.  If they wait until next week/month/quarter they can get the same property for less.  A healthy dose of inflation should help them realize that prices might not fall forever.

Maintaining a healthy level of inflation (over deflation or stag-flation) will do wonders to get our economy back on track.  Even the expectation of impending inflation should be very helpful.  If anyone needs confirmation of this, take a look at Japan in the mid-1990′s (or call me and I’ll walk you through the interaction).