Do Surging Prices and a Decrease in Spending = Restrained Inflation?
May 14th, 2008 by Kathy Ptouchkina | Leave a comment on this post below!As things currently stand, the Fed cares much more about the general economic slowdown and potential recession than about keeping prices in check. That’s not to say that inflation i sn’t important or is being completely ignored by the Fed. Not at all. But for the time being, concerns over inflation are on the backburner in favor of sustaining financial liquidity. That seems to be the Fed’s standpoint.
This approach is easy to see just by following recent movements in interest rates. The Fed has been steadily cutting its benchmark interest from 5.25% to 2% throughout past half a year. And since there is no free cheese, financial liquidity has cost the Fed inflation headaches. However, low interest rates are not the only factor contributing to the risk of inflationary spiral. Surging food and oil prices add their fair share to the problem. Former Federal Reserve Chairman Paul Volcker:
This situation reminds me of the early 1970s when we had explosions in oil prices [and] in food prices against the background of low underlying inflation, and it was not dealt with forcefully because of concerns about the economy.
The release of recent economic data by Labor Department shows that the consumer-price index rose 0.2% in April from a month earlier. These so-called core consumer prices, which exclude food and energy, went up by only 0.1%. Released numbers are below analysts’ expectations. It appears that, without a significant increase in wages, surging oil and food prices decrease consumer purchasing power and as a result restrain inflation.
Were the economists wrong in assuming that the only possible combination of inflation and economic slowdown is stagflation? Is it possible that a decrease in demand due to surging prices for food and oil will keep inflation in check? And if such a restrain on inflation is possible, then for how long?
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