Ben Bernanke arrived at his office a week ago and came face to face with his worst nightmare.

Staring out at the Federal Reserve chairman from page C1 of the Feb. 3 edition of the Wall Street Journal was a photo of a man and his boxes. The man was John Anton, founder and president of Anton Sports. The boxes contained his inventory of T-shirts. Because the price was right, Anton borrowed $300,000 at 2.45 percent to lay in a year’s supply ― 2,500 boxes compared with a more normal 30 ― in anticipation of higher cotton prices.

And why not? He has seen the future, and the future is higher prices. When commodity prices are rising faster than the cost of financing inventory, businesses have every incentive to stockpile, even if they don’t expect a pick-up in sales. It’s profit-maximization, pure and simple.

Is this what the Fed had in mind when it floated the idea last year of raising inflation expectations to lower real interest rates to get America spending again? I doubt it. But it’s the natural outgrowth of all its efforts.

Take QE2, for example, the Fed’s second foray into quantitative easing via the purchase of $600 billion of Treasuries from November through June. To the extent that the goal of QE2, as outlined by Bernanke, was to drive down Treasury yields and drive up the prices of other financial assets to make consumers feel wealthier, there is reason for concern.

It wasn’t long ago that double-digit annual increases in home prices made consumers feel wealthier. They borrowed and spent until that wealth evaporated.

The Fed seems to have succeeded, and maybe too well, in thwarting deflationary psychology, thanks to some help from overly easy monetary policy in some developing countries and booming commodity prices.

Which brings us back to Anton. He isn’t hoarding T-shirts because he expects the consumer price index to rise, say, 3 percent next year. He’s hoarding T-shirts because he expects cotton prices, which jumped 137 percent in the past year, to increase further.

“Everyone faces a different expected inflation depending on what he does for a living,” says Neal Soss, chief economist at Credit Suisse in New York. “That’s one of the real weaknesses of the expected inflation/real rate story.”

Don’t tell Fed policy makers. Their models determined that raising inflation expectations would lower the real interest rate, making it less attractive to hold cash and increasing the incentive for consumers to spend. Their models never envisioned a rise in nominal rates.

The yield on the 10-year Treasury note shot up to a 10- month high of 3.74 percent earlier this week from 2.4 percent in October. Most of that increase has been in the real rate, which the Fed now says reflects increased optimism about the economy.

Anton, of course, is an anecdote. Somewhere out there, just waiting for a journalist to knock on his door, is his counterpart, whose experience with prices is confined to those that are falling.

It just so happens Anton illustrates a dominant theme, which is rising global commodity prices, food riots in less developed countries where a large share of income is spent on necessities, and fears that the Fed missed the boat on QE2 (sorry).

Forget the frequent references to “food inflation,” “commodity inflation” or, even worse, “cost inflation.” (Thank goodness there’s no “wage inflation” at the moment!) These are all misnomers. Yes, food prices are rising, as are commodity prices. They aren’t inflationary per se unless the Fed allows those relative price increases to translate into a generalized rise in all prices.

The best way to ensure that happens is to keep interest rates at zero, creating an incentive to borrow at a low rate to finance something that’s appreciating in price.

To date, there’s no sign of a borrowing binge. Commercial and industrial loans, which companies use to finance inventories, have inched up in the last two months after a two-year decline. And the amount of credit-card debt outstanding posted its first increase in December after 27 monthly declines. Still, bank credit, which posted back-to-back increases in July and August, is contracting again, according to Fed data.

At a hearing of the House Budget Committee yesterday, Bernanke reiterated that the Fed has the means and the motive to pare its $2.47 trillion balance sheet and raise the benchmark rate to avert an unwanted increase in inflation “at the appropriate time.”

The last time the Fed was prescient, and preemptive, was 1994, so I wouldn’t count on it. Let’s hope they start down the Road to Normal before they find out we’re all John Antons now.

By Caroline Baum

Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own. ― Ed.

(Bloomberg)