This is the question of the hour. Inflation seems to be the word on everyone's lips, and discussions of it positively dominate the financial headlines right now. A great many investors are banking on a continuation of last year's war-time commodities price inflation. What they apparently haven't counted on is the end of the war and a new period of relative "peace" and stability for a while, and with it a decline in inflationary pressures in the economy and commodity markets.

For insight into this great debate on inflation, a letter to the editor in the June 28 edition of Barron's seems to capture the current feelings of the inflation crowd. The letter states, "The Fed is at present behind the inflation curve, and will find itself either unable or unwilling to adopt a sufficiently restrictive monetary policy. We are therefore likely to be entering an environment like the 1970s."

With all the intensive focus on inflation, a contrarian should be asking if maybe inflation hasn't already peaked. To this end, I collected a series of headlines from the London Financial Times over a two-week period in June and constructed what I like to call a "fear collage." This is a collection of news headlines that reflect extremes in mainstream investor fear. Whenever headlines commonly appear in the financial press with terms such as "fear," "worry," or "concern," it usually means the prevailing trend has reached its zenith. In this case, expressions of fear over inflation strongly suggest that inflation has peaked in the U.S. at this time.

Another indication that inflation has peaked is the CRB Index of commodities. The CRB has broken down beneath its 30/60/90-day moving averages and is struggling with its 30-week MA, which reflects a shift of trend in the short-to-intermediate-term. Whenever an intensive war campaign is wrapped up, liquidation of inflation-sensitive commodities always follows. Over-inflation of commodities by war-time spending will be brought back into line in the coming months. The recent action of the CRB Index is starting to make this clear.

Let's go back to the statement from the Barron's letter to the editor. The gentleman expressed his opinion that we are likely to be entering an environment like the 1970s. This isn't very likely in my opinion, especially as we are a very long way from that point along the K-wave. Inflation of that magnitude only comes around once every 50-60 years. We are only about 24 years removed from the previous K-wave inflation peak, which means we have a long way to go before we have anything approaching unto a repeat of the 1970s.

The venerable Richard Russell sees the longer-term threat as being deflationary, not inflationary, a sentiment I can only echo. In a recent issue of his Dow Theory Letters, he writes: "Any time the Fed eases up on its inflationary operations, deflation begins to take over....The fact is that the Fed is actually not inflating enough." Read that last sentence again.

Russell further states, "Contrary to what everybody seems to believe, there is not enough liquidity in the system. Any time the Fed eases up on the money supply or any time the Fed does not create enough liquidity, the dollar surges and gold drops." He concludes that "the larger global background is deflationary, and I have to believe that Greenspan knows that."

Indeed, the current obsession with inflation among investors is a case of the "old generals fighting the old wars." So many of today's investors lived and cut their teeth during K-wave inflation that they don't seem to know any other way. What they fail to comprehend is that the type of inflationary environment of the '70s is literally a once-in-a-lifetime experience that is always followed by a long-term period of disinflation, and at the extreme, outright deflation.

The gentleman who penned the letter to the editor of Barron's expressed his opinion that the Fed "will find itself either unable or unwilling to adopt a sufficiently restrictive monetary policy." He seems to think that a tight monetary policy would be a welcome thing, and that tight money would somehow counteract price inflation. But a restrictive monetary policy would be the death knell of the financial markets and Greenspan knows it. That's why the Fed will continue to pump, and despite all the pumping, consumer price inflation will not expand to unsustainable levels on a longer-term basis. The loose money policy will only help to feed equity and real estate prices at the expense of other assets.

The preponderance of evidence seems to suggest that inflation has indeed peaked and that concerns about a return to the 1970s are vastly overstated.