Inflation, the dollar and the future Posted by: McQ
on Tuesday, May 13, 2008
According to the IMF, inflation is raising its ugly head and is a threat to world-wide economic stability:
``This inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability,'' John Lipsky, the IMF's first deputy managing director, said ... A return to 1970s- style high inflation and rising price expectations ``cannot be discarded out of hand,'' he said.
The problem is being tied to the upsurge in both energy and commodity prices, such as corn and soybeans. And of course, none of that is helped by the declining dollar:
IMF research indicates that if the dollar hadn't fallen from 2002 to 2007, oil prices would be $25 a barrel lower. Crude oil futures surpassed $120 a barrel this week for the first time. Commodity prices excluding fuel would be 12 percent lower, Lipsky said.
Middle East and Asian countries that keep their currencies linked to the dollar are seeing inflation pressures worsen as a result, Lipsky said.
``In the euro area, the sharp rise in inflation and concerns about potential deterioration in inflation expectations are dampening consumer confidence and spending,'' he said. ``The inflation outlook appropriately is central to the ECB's policy considerations.''
Crude oil prices have almost doubled in the past 12 months and commodities including corn, wheat, rice and soybeans have all reached records this year. In the U.S., consumer prices climbed 4 percent in March from a year before, up from a 2.8 percent rate in March 2007. Inflation in the 15-nation euro region accelerated to 3.6 percent two months ago, the fastest in almost 16 years.
Part, but certainly not all of the problem in the commodities market has been driven by various government decisions to subsidize ethanol made from these commodities. Thankfully, some are now reconsidering those decisions.
``Inflation rates are expected to remain high for a rather protracted period of time before gradually declining again,'' ECB President Jean-Claude Trichet said at a press conference in Athens today.
Fed officials anticipate that slowing U.S. economic growth and rising unemployment will help curb inflation. Policy makers last week signaled they're ready for a pause in cutting rates after seven reductions since September.
Not a particularly appetizing remedy for inflation, but certainly probable in terms of the US economy. But then also off in the wings a bit is the worry of stagflation.
All-in-all, it would seem we're in for a bit of a bumpy economic ride, at least for the short-term.
Correct me if I am wrong, but isn’t inflation mainly due to monetary policy, i.e. printing too much money, rather than simply prices moving up in accordance with normal supply and demand?
The price of commodities isn’t going up because all of a sudden we have more physical dollar bills in our pockets, but because more people all over the world are consuming in richer and richer fashion, bidding up the prices.
There are a whole lot of buildings going up in China and India, and a whole lot of people buying cars. This is what is making prices go up.
It may feel like inflation, but its not quite the same thing. (I am not an economist, so if I am wrong, please let me know!)