WASHINGTON - A historic economic crisis has left Americans with plenty of things to worry about. But is inflation one of them? And is there a risk that fretting over higher prices may actually bring them about?

The answers to these questions will help define the timing of the Federal Reserve's pullback from an unprecedented level of monetary stimulus, deployed to combat the worst financial panic since the Great Depression.

In justifying its pledge to leave interest rates near zero for the foreseeable future, the Fed takes comfort in inflation expectations, which policymakers deem comfortably restrained.

On the surface, that appears true. The most recent Reuters/University of Michigan consumer survey showed a 0.2 percentage point decline in expected inflation one-year out, to 2.5 percent. Market-based barometers have fluttered higher, though not alarmingly so.

Yet beneath the weak economic backdrop keeping prices in check, economists and consumers are increasingly uneasy about the prospect of a continuous loss of purchasing power -- the very definition of inflation.

We have the most potentially inflationary policy I have ever observed in a developed country, said Alan Meltzer, a Fed historian and professor of political economy at the Carnegie Mellon Tepper School of Business in Pittsburgh.

According to widely used economic models, the way consumers perceive the prospect of future inflation has clear implications for prices themselves. Once higher costs are taken for granted, they are more easily tolerated.

Several indicators are already hinting at that possibility.

The price of gold, often viewed as a hedge against inflation, has set record after record, peaking above $1,200 an ounce earlier this month before retreating to below $1,100. A recent JPMorgan survey of clients found that 61 percent expected U.S. inflation to be above target between 2011 and 2014.

Another consumer confidence survey, published by The Conference Board, showed Americans expect prices to climb a troubling 5.1 percent over the next 12 months.

And Google Trends, a websearch database, shows a sharp spike in the number of U.S. users looking up the word hyperinflation in late 2008 and early 2009.

There is a real risk that inflation expectations will rise above a certain threshold that suggests a loss of credibility of the Fed, said Laurence Meyer, a former Fed governor now at Macroeconomic Advisers in Washington, DC.

MIND OVER MATTERS

That may seem surprising considering the world has faced a crippling financial crisis that many economists warned might lead to deflation. But it makes sense in the context of the extraordinary measures taken to halt the meltdown.

Experts who have studied bouts of inflation, most common in poor or developing countries, say the makings of an inflationary psychology are already in place in the United States. It begins, they say, when unfathomably large figures are bandied about as if they were mere change.

A cascading series of government bailouts certainly fits into that category. The Treasury spent nearly $800 billion on a stimulus package that has helped ease the pace of job losses but not yet begun to reverse them. The Fed committed to buy more than $1.7 trillion in Treasury and mortgage bonds and expanded credit in the banking system to over $2.2 trillion.

There is an unprecedented amount of latent inflation represented by the $2 trillion monetary base, said Michael Pento, senior market strategist at Delta Global Advisors. Unless the Fed can sell those holdings and raise interest rates in a timely manner, intractable inflation will be in our future.

ENTER THE SLACKERS

Another camp of economists say all the hand-wringing is overdone. They point to the labor market, in its worst shape since the 1980s, as a sure sign that the economy is sufficiently weak to keep price pressures at bay.

Japan provides the most obvious model for how such slack can affect prices. As bubbles popped in the housing and stock markets, the Japanese economy was stuck in a deflationary rut for the better part of two decades, despite heavy government spending.

During America's last run-in with inflation in the 1970s, wages were a key channel for price increases. Stronger unions meant workers could demand cost-of-living increases to keep up with the ever-rising consumer price index. With that dynamic largely absent today, say skeptics, inflation fears are misplaced.

So far, the hard figures corroborate their view. Consumer prices rose just 1.8 percent in the year through November, and were up 1.7 percent, excluding food and energy, well beneath the recent yearly average.

Such tame readings notwithstanding, anxiety about the longer-term outlook is rising and has been reinforced by the resilience of energy costs in the face of a global recession.

We will emerge from the crisis with an excess money supply because, despite their independence, central bankers are still feeling the pressure from finance ministers to allow slightly higher inflation in order to be able to service large public debts more easily, said Jorg Kramer, chief economist at Commerzbank.

(Editing by Padraic Cassidy)

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