What Will it Take to Control Inflation?

Just when you thought reality was setting in at the Fed, you get reminded how silly that idea really is.

I say that because lately the Fed has been talking about how bad inflation is, and how they need to be ‘vigilant’ so that inflation expectations don’t deteriorate.

If you talk to anyone on the street, I bet they have noticed that prices are higher for just about everything. I don’t know about you, but I sure think that inflation expectations are already pretty bad.

So, you would think they’d be really hawkish about inflation at the meeting.

Maybe that’ll happen at another meeting, because it sure didn’t happen at the one on Wednesday.

Sure, they mentioned inflation expectations have increased. But here’s the line I read on Bloomberg that killed me …

The Committee expects inflation to moderate later this year and next year”

That’s right – even though gas prices have nearly doubled in the last year… even though the price of wheat has skyrocketed… even though the price of nearly every food you can think of has gone higher… they expect inflation to moderate.

They think that when the U.S. economy slows it will reduce demand and prices will move down to stimulate demand. This makes sense, except for the fact that the world isn’t all about the U.S.

You see, the price of imports into the U.S. has gone up well over 15% in the past year. Yet for the most part, this inflation hasn’t completely hit consumers.

And the sad fact is, the prices we pay for overseas items will continue to move higher. Over in Asia, they are experiencing some wicked-nasty inflation right now. And it won’t stop in the next year, despite a slowdown in U.S. demand.

So long as emerging economies like China continue to grow as fast as they are, inflation will continue to be a threat. And the reason why is simple. Because as these emerging economies modernize, they will need more food, more gas, more wood, more metal, more of everything per capita than what they use today.

That means demand from emerging economies for all these things could double… even triple in the next ten years. That demand should more than offset any reduced demand from the U.S. or other modernized economies.

It’s no wonder that countries in Europe and other parts of the world are actually increasing their interest rates. They’re doing it because inflation is more than a threat, it’s real. It’s there, affecting everybody’s lives.

And it’s affecting everybody here too.

As long as interest rates stay as low as they are in the U.S., inflation will continue to be a problem. We can only hope that Ben Bernanke realizes that he has to push rates higher to control the inflation we see today.

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