According to official reports, inflation currently hovers around 1.7%: nice and low. Admittedly, past rounds of quantitative easing haven't produced much in the way of inflationary pressure. But if the open-ended nature of QE3 does finally succeed in driving economic growth, I believe you can expect the price of many everyday things to go up. Clothing, electronics, tires for your car, books, hair spray -- pretty much all the dry goods that make up the material side of your day-to-day existence will rise in price. Anytime there's an increasing supply of money chasing a fixed supply of goods, prices rise.
Most people feel the effects of rising prices the most acutely during their trips to the grocery store. We've already seen food prices rise due to drought conditions in the farm belt. As QE3 progresses, prices of farm commodities could continue to rise. Corn, soy, wheat, coffee, dairy, fruits, vegetables -- higher prices in the futures markets translate to a higher grocery bill.
Much of the fluctuation you see in the price of gasoline is due to speculation in the oil markets. Sometimes all it takes is a hurricane threatening the Gulf of Mexico (where much of the country's refining capacity is located) or an announcement of sanctions against an oil-producing country to send prices soaring.
QE3 could spur another wave of speculative activity like the one we saw back in 2007 and early 2008, which took oil prices close to $150 per barrel. If that happens again, $5 gasoline could be in our future.
QE3 isn't all downside. There's a reason the Fed is buying mortgage-backed securities: to push mortgage rates even lower than their current historic lows. According to the National Association of Home Builders, residential investment, plus the housing services that go along with it, historically account for about 17% to 18% of GDP. When the housing bubble burst in 2006-2007, it took a lot of America's economic growth with it.
But even though the Fed is targeting mortgage-interest rates in particular with QE3, you can expect pretty much all the rates you get paid to stay low. So while a lower interest rate on your mortgage is good, a lower rate of return on your checking, savings, or money market account isn't. Yields on your interest-bearing checking and savings accounts are already pathetic. Get ready for more of the same.
The U.S Federal Reserve has two mandates: to keep the country at close to full employment, and to keep prices stable. With QE3, the Federal Reserve is prioritizing employment over price stability, with the thought that it can stop buying these mortgage-backed securities if it sees inflation bumping up by too much. Everybody knows Ben Bernanke is a smart guy. We're about to find out just how smart.