2010: What are the key metrics Buffett looks at to evaluate future inflation?

AUDIENCE MEMBER: Mr. Buffett, my name is Jeff Chen (PH) from San Francisco.

I wanted to ask you a little bit more detail about the inflation question, wanted to know what are the key metrics you look at when you evaluate future inflation and your valuation methodology?

And what are some of the catalysts that’s going to cause the inflation to rise in the future?

WARREN BUFFETT: You give me credit for more brain power than I actually bring to the question.

I don’t think you can look at any given metric in any given month and figure out exactly what that’s going to do to inflation rates because, so much — if it gets going so much, it creates its own dynamic.

You know, we saw that in the late 1970s and early 1980s until Volcker came along with a sledgehammer to the economy.

But we had people running from money at that time, and, of course, we got the prime rate up to 21-and-a-fraction percent, and we got governments up to very close to 15 percent.

So we had a little demonstration project 30 years ago in this country of what happens when people get fearful about money.

And if we were to continue the policies we have now, I would think something — a rerun of that, you know, could be fairly likely.

But, you know, trend is not destiny. We have the power to do things, and Congress has the power. And that’s why I wrote that op-ed piece a year ago, to sort of flash a yellow light.

We have the power to control our future, and we do it through elected representatives.

I will just go back to the conclusion that, based on what I see happening, American people, government around the world, I think currencies are a poorer bet than they have been for some time. But I have no idea what that means in terms of rates of inflation. And I hope I’m wrong on it.

I would say if inflation ever really gets in the saddle, that it gets very unpredictable as to how fast it can accelerate and how faith in institutions can break down. A lot of things — a lot of bad things could happen with it.

Charlie?

CHARLIE MUNGER: Yeah. The best defense, of course, is to contribute as much as you can to the civilization and expect to counter inflation’s effects by your own merits.

That’s the safest antidote. The idea that just by outsmarting other people you can somehow profit from the inflation is a much more dangerous course of action.

WARREN BUFFETT: Yeah. Your money can be inflated away but your talent can’t be inflated away. If you’re the best brain surgeon in Omaha, or the best painter, or whatever it may be, you will always command your share of the resources around you, you know, whether the currency is seashells or $10 million notes, or whatever it may be.

Talent is a terrific asset to deal with any kind of a monetary situation. But Charlie and I have to fall back on money.

WARREN BUFFETT: Carol? (Laughter)

CHARLIE MUNGER: Too late for talent.

WARREN BUFFETT: Yeah.