Bernanke's Bet

The danger of an inflationary wage-price spiral, goes this argument, is negligible because unemployment is high and pay is stagnant.
Maybe. But inflation’s dynamics might be changing. Here’s why. The recession caused enormous factory and business closures; now, there’s less capacity to meet rising demand. Companies have more power to raise prices; a depreciating dollar compounds the effect by making imports more expensive.

You can see this vividly in two industries: autos and airlines. Since 2006, General Motors, Ford and Chrysler have shut about 25 percent of their capacity, says economist Sean McAlinden of the Center for Automotive Research. Car “incentives” (a.k.a. price discounts) are shrinking—which means prices are rising. The same thing has happened with airlines. In 2009, they made the biggest percentage cutbacks in capacity since 1942; the number of daily domestic departures (24,798) in late 2010 was nearly 10 percent lower than in 2007. In March, domestic airfares were 11.5 percent higher than a year earlier.