PrintMarch 1, 2011
Inflation: What me worry?
Ben Bernanke, in an appearance before Congress on March 1st, told the assembled Senators that inflation worries are overblown. In regard to the prolonged rise in oil and other commodity prices, he said the more likely outcome is a temporary and modest increase in consumer prices, not runaway inflation.
He is quoted by the Globe and Mail as saying: "The most likely outcome is that commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation."
However, further in his testimony Mr. Bernanke revealed the underlying thesis of the Federal Reserve on why inflation will remain under control.
Per the Globe and Mail report on the hearing:
Political upheaval in the Middle East, Mr. Bernanke said, has caused oil and gasoline prices to march much higher. However, Mr. Bernanke said he and a majority of his Fed colleagues continue to believe that the situation won't lead to out of control inflation.Workers have little power to demand big pay increases because the job market is still weak. Many factories and other companies are operating well below full capacity because customer demand is far from booming. Those forces will prevent inflation from taking off, Mr. Bernanke said.
Mr. Bernanke is thus relying on the long-term unemployment situation to continue to stifle demand and in turn keep inflation under control. However, commodity prices are set in strengthening global markets, such as China, not the weak US economy, which co-incidentally commands a much smaller share of the global economy today than in the recent past and is more reliant than ever on global supply and demand factors.
There now exists a massive global commodity and (in Asia) a property bubble much larger than the US housing bubble which almost brought down the global financial system.
The commodity price surge is mostly traced to strong demand from China and other big emerging markets, combined with weather disruptions and a generalized global inflation shock, exacerbated by the loose US monetary policy of the Federal Reserve. Mr. Bernanke's reliance on the internal US market and traditional demand and supply factors is a very high risk approach as the chances are the US can no longer control inflation within its borders regardless of the unemployment situation.
The last time the US ran such a loose monetary policy in combination with high unemployment was in the 1970's, and the result was global and US "stagflation" with high unemployment and runaway inflation, it took three very difficult years and a Ronald Reagan in office to overcome the devastation of that period.
Inflation is taking off all over the world. Over the next six months there are going to be many surprises on the inflation numbers as world affairs continue to de-stabilize and economic growth will move in fits and starts. Many governments are saddled with enormous debt burdens and will have to employ mandatory budget cutbacks as well as having to raise interest rates to battle inflation. The result may well be a repeat of the 1970's. If the commodity and Asian property bubbles burst, the consequences will be devastating to world financial markets.
On the overall economy and joblessness, Mr. Bernanke warned that while he was confident economic growth would increase this year, it would not be strong enough to quickly lower unemployment and that it would take several years for unemployment to drop back to normal. Previously the Fed had projected the unemployment rate would remain in the 8-9% range through 2012.
The Federal Reserve strategy and the Obama administration with its enormous deficit spending policies and failure to develop domestic energy sources are putting the country is a very precarious situation, potentially one greater than 2008, as global factors will play an even larger role. The Fed and the Government are playing very high risk game of poker with the future of the nation.
