Why on earth would inflation hit the US?

Leaving aside the oh-shit-we-are-all-fucked scenarios (ie, collapse of trust in the US currency or maybe another 70's era oil shock) what on earth could cause inflation at the moment?

Sure, your interest rates are low, but domestic demand levels are so low that everyone are desperately cutting prices to try and create some demand. Combine that with very high unemployment and it's simply not a high inflation environment.

I'd be more worried about deflation than inflation at the moment.

Because the U.S. has "printed" plenty of money in the past two years and is going to "print" some more:

http://blogs.forbes.com/greatspeculations/2010/10/04/looking...

Adding more currency without backing is a sure way to cause inflation, I hear. How they've been avoiding this is by China and then the U.S. sinking money into U.S. Treasury bonds, I hear also. When the U.S. makes claims that the economy is not good (which they've done quite a bit), I wonder if they are trying to influence investors to invest in these bonds rather than stocks, or if they were really trying to warn us that something bad is coming. Either way, as a consumer, I'm worried.

but the big problem for you guys is: it's expected that China holds something around 1 trillion of the US GDP in treasury bonds. So whenever they feel the US economy isn't trustworthy anymore, selling these will hit like a train.

their growth rate is really high right now, so it's a delicate situation.

The problem is not even in selling. They would need someone to sell to. Once China stops buying it will be the beginning of the spiral down in the prices of US bonds.

China is the only emerging market that needs the US economy going and for the American consumer to keep its purchasing power. China can only stop buying when their domestic market gets big enough to sustain the hit that it will eventually come.

The Chinese can't stop buying bonds if they want to keep their currency depressed relative to the dollar. Moreover, they have no intention of stopping the gravy train - tanking the US economy (further) would only hurt their own largest market, and no other large market is as willing to accept one-sided trade and currency policies as the US.

The Fed bought up 1 trillion in mortgage debt and no one blinked -- that is why mortgage rates are 4%. If China started dumping their T bills the Fed would just buy them up. It wouldn't hit like a train -- more like a tricycle.

But the U.S. can't do that forever without inflation, because they either have to cut spending (which wouldn't happen due to fears it might affect unemployment and the economy), raise taxes (same deal, and is even more of a political mess), or print money. Printing money in bulk over and over leads to inflation. Inflation causes people to slow spending.

They are printing money to directly manage interest rates and indirectly manage inflation. If the Chinese liquidate the debt they own, the Fed printed money to buy the debt, and Chinese spent the money employing americans eventually that might cause wage inflation. That process seems slow enough that inflation would be no big deal to manage.