Resident Fellow David Frum

The late 1960s were a tough time to be a kid. There was a time that you could buy a bag of potato chips for a nickel. Then the bag cost a dime. Then 15¢.

It took a lot of growing up to understand what was really happening: It wasn't the cost of potato chips that was going up. It was the value of money that was going down.

We learned that this general decline in the value of money was called "inflation." We accepted as necessary the painful struggle to subdue inflation in the 1980s. We became hyper vigilant to any sign of inflation's return.

Now, prices are rising again: oil, food, metals and other commodities. Central bankers--the defenders of the purchasing power of money--are nervously checking and rechecking their arsenal of anti-inflation weapons. Should they raise interest rates? How much and how soon?

Those of us who came of age in the 1970s instinctively lean toward crushing inflation early. U.S. Federal Reserve Chairman Ben Bernanke (born 1953) has been issuing inflation warnings for two years. But there is always a risk of overlearning the lessons of the past. Just as the Depression generation's excessive anxieties led them to ignore the gathering inflation of the 1970s, so maybe our Great Inflation generation may be looking the wrong way today.

Here's a radical thought: Yes, of course we are experiencing and (most of us) suffering the effects of a surge in the prices of basic commodities. Certain important modern services--especially health-care--are also climbing in cost at a fearsome pace.

But is that necessarily the same thing as "inflation"?

Inflation is a sustained rise in the general price level. A few spectacular price increases do not a general price increase make. Rather, what we may be seeing here is not a price rise, but a price tilt.

Through the 1990s, the prices of many goods and almost all commodities steadily declined. Consumer electronics, food, oil--all cost dramatically less at the end of the decade than they did at the beginning.

This price decline yielded an increase in consumer welfare. In 1990, only slightly more than half of U.S. households subscribed to cable television. Ten years later, two-thirds did. In 1990, 5 million Americans owned a cellphone. By 2000, almost 110 million did. One in seven households owned a computer in 1990; by 2000, nearly half owned at least one. Americans ate more prepared foods, bought more clothes and took better vacations.

They did all these things even though wages did not rise dramatically over the period. Rather, because prices dropped, any given wage was able to purchase a higher standard of living.

Could it be that this benign period--benign for Americans and other Westerners anyway--is now going into reverse?

China's new wealth is expressing itself in a rising Chinese currency--and higher prices for Chinese manufactured goods.

Richer Chinese and Indians are able to pay more for commodities. That puts more money in the pockets of Russian oil exporters, Nebraska corn growers and Chilean copper producers. Or rather, it transfers money to those people from North American and European workers and consumers.

If that theory is correct, what we are seeing now is not an inflation, but a massive global wealth transfer--and a transfer that's unfavourable to the workers and consumers of the Western world.

This transfer must eventually end. We'll develop substitutes for oil sooner or later, and today's corn boom will call forth a huge new supply from Africa, and other regions of underdeveloped agricultural potential.

But "sooner or later" can last a decade or longer. In the meantime, misinterpreting a rise in certain prices as a rise in prices overall can lead to very dangerous mistakes. The medicine for inflation is higher interest rates. Applying higher rates to a U.S. economy already heading toward inflation will be painful. And if indeed today's price rises are not a real inflation, then this pain is pointless, counterproductive, and dangerous.

Just as the policy-makers of the late 1960s tipped the world into an avoidable general inflation in order to avert a greatly exaggerated risk of recession, could today's policy-makers tip the world--or, anyway, the United States--into an unnecessarily harsh recession in order to avert another imaginary fear?

I don't know the answer. But I sure hope that today's central bankers are worrying about the question.

David Frum is a resident fellow at AEI.