Even more hysterical voices said a return to 1970s-style stagflation -- a stagnant economy that nonetheless sees purchasing power decline thanks to runaway inflation -- was in the cards.
Now, amid a remarkable bounce back in manufacturing activity around the world, another worry looms. Surging commodity prices amid booming demand are leading to fears of inflationary forces.
Don't Worry So Much for Corporate Profits
While the worries are real, investors should also keep them in perspective. The downside of better growth than most predicted should be welcome, given the alternatives for now.
And for all the talk that spiking inflation will crush profit margins and the stock market, the real toll may instead be on consumers at the lower end of socioeconomic sector, the people already hit hard by the recession. Consumers struggling to make ends meet, not corporations with surging profits, are most at risk.
At 60.8, the ISM index signaled strong expansion. Even the reading of 57 that many on Wall Street had expected would be consistent with a GDP growth rate of over 4%, analysts at JPMorgan (JPM) wrote in a research note this week.
And the ADP private sector employment report on Wednesday added to encouraging signs on the jobs front.
Rising Energy and Food Prices
Despite the overall bullish ISM data, signs of inflationary pressures are mounting, too. The prices-paid component of the index jumped to 81.5 from 72.5, the highest since July 2008.
Prices at the gas pump are rising, and food costs could go up as well. Retail gasoline prices have moved up 15% since August, analysts at JPMorgan wrote, and rising financial markets are indicating food costs could go up, too.
"While food prices have not moved up nearly as fast as energy prices," the analysts said, "prices of exchange-traded foodstuffs remain on the rise, and eventual steeper increases in final consumer food prices seem likely."
Concerns About Cutbacks on Basic Items
For the moment, inflation seems unlikely to tank the stock market. In fact, interest rates around the current level have historically been associated with price-to-earnings multiples in the low- to mid-20s, according to some analysts. Even with the recent rally, the S&P 500 still trades at less than 15 times this year's earnings estimates.
Rather than slamming the stock market, rising prices may disproportionately hit the wallets of financially ailing Americans, and chatter about cutbacks on basic items is on the rise.
For example, according to JPMorgan, households in the bottom fifth of income distribution spend 9% of after-tax income on gasoline -- while the top fifth spends only 2%.
Fears that rising prices will dampen overall consumer demand are also misplaced, given the massive purchasing power amassed by the wealthiest. Final sales and big-ticket items like auto sales have continued to do well.
Instead, if prices rise rapidly the "burden will fall disproportionately on the lower end of the income distribution," analysts at JPMorgan wrote. That means Main Street will feel any inflationary crunch before Wall Street does.