"inflation may “firm” during any rebound if the Fed holds interest rates low for too long."

Here's another inflation worrier. From the WSJ:

"Federal Reserve Bank of Richmond President Jeffrey Lacker warned Friday that economists shouldn’t count on a weak economy to automatically reduce price pressures.

Lacker also outlined a relatively optimistic scenario for the U.S. economy despite the current “trying times,” saying consumer spending could rise sharply once labor market uncertainties recede and the housing drag should lessen next year.

Against that backdrop, Lacker cautioned that inflation may “firm” during any rebound if the Fed holds interest rates low for too long.

While many economists expect a weak economy to result in a decline in core inflation, which excludes food and energy, “I would be cautious about relying on it as a causal relationship,” Lacker said in prepared remarks to the Tech Council of Maryland."

I agree that;

1) The economy is in better shape than many think

2) The decline in prices is temporary, and different than deflation

"Lacker noted that while it may seem “premature” to talk about inflation in the midst of recession, “we need to be sure our policy remains consistent with a strategy that does not allow inflation to ratchet up over the business cycle.”

Once the recovery begins, the temptation is to keep interest rates low until a clear rebound is ensured, Lacker noted. “The risk associated with that path is that inflation may not moderate obediently during the downturn, and may firm with the ensuing recovery,” Lacker said.

Meanwhile Lacker offered a number of reasons to predict a recovery next year, which he called a “reasonable expectation.”

For one, monetary policy is “quite stimulative,” Lacker said, while energy prices have reversed most of their past gains, which “will free up a portion of consumer budgets for spending on other goods and services.”

Meanwhile, the drag from housing should lessen next year, though Lacker joked he’s been making that forecast for three years now, “so my outlook is tempered by more than the usual amount of humility.”

In addition, Lacker said that once uncertainties surrounding labor, housing and equity markets fade, consumer spending “is likely to pickup substantially.”

I agree that:

1) We need to really worry about inflation down the road

2) The economy will improve next year