Periods of moderate inflation can be good for an economy; Japan is right now trying to create some inflation. Inflation is not easy for people to perceive. For example real estate purchased in the 1980s for $130,000 that inflates to $400,000 by 2007 appears to be a wise investment, until you do the math and find the return on investment is only 4.5%. After inflation for that period, the real return was less than 1.5%. Still if you don't do that math (and most don't) it creates a kind of wealth effect in people’s mind and that is good for the economy.
From a simplistic standpoint inflation is a result of too much money printing flooding the market. That is what happened in Germany in the 1920’s and the United States in the 1970’s. Many alarmists feel that the current fed stimulus is a kind of money printing and that the results will be hyperinflation. It was this crowd that created speculative Gold Bubble. See my article After the Gold Rush.
But what quantitative easing really did was increase the US national debt, give the funds to the banks at near zero interest, the banks bought US Treasury Bonds at 2% return and used the assets and profits of these “risk free” trades to bolster the bank’s balance sheets.
Because the 2007-09 recession hit the financial sector especially hard, banks are holding back on lending as they rebuild their capital. Many consumers are over-indebted and are trying to pay down their balances instead of borrowing more. In some cases, their credit lines are being cut or they are having a hard time getting additional credit. Depressed housing prices have not only slowed the turnover of real estate, but have also removed one of the cheapest ways of borrowing – home-equity loans. Finally, although companies are piling up huge amounts of cash, they have no reason to spend aggressively on expansion and new ventures when consumer demand is depressed and the financial and political outlook remains so uncertain.
What many people fail to understand is that the money created by the Fed, through programs like Quantitative Easing, is what’s known as “state money” (monetary base). In the U.S., this makes up only 15 percent of the money supply, broadly measured. The remainder is made up of “bank money” — the all-important portion of the money supply produced by banks through deposit creation.
More stimulus, by itself, won't be able to get the economy moving again. The government can run a huge deficit, the Fed can hold interest rates down, and Fed Chairman Ben Bernanke can pump money into the system with a third round of quantitative easing, but that won't necessarily make the economy speed up – at least not right away. On the other hand, the fiscal cliff, with its spending cuts and tax increases, could depress the economy further.
Click here to hear it Bens own words (caution: this is really boring)
The United States has been moving up the value add chain. Today the US is manufacturing more advanced and profitable products, adding value with innovation and technology. They also are losing many low-end manufacturing jobs and that creates high unemployment. So long as unemployment remains and banks do not over lend the odds of hyperinflation are remote.