Inflation Bites With A Vengeance

April 10, 2008 by Douglas A. McIntyre

The World Bank says that food prices will stay above 2004 levels until 2015. Over the next two years they will rise from current levels. Wheat prices have almost tripled in a year. The situation with rice is worse.

Oil prices hit a record worldwide yesterday and gas prices hit a record price in the US.

According to The Wall Street Journal "Rising prices for food, energy and other raw materials account for much of the pickup in inflation rates". Even though costs in the US are rising at the fastest clip since 1995, they are at a controlled rate of 2.6% per annum. But, in large economies like China inflation is in the double digits for most foods. China’s energy prices would be rising just as fast if the government there did not buy oil at high prices and take a loss in selling gas and diesel below market.

The US has been something of a "walled garden" when it comes to inflation. Much of the world’s food commodities come from here. These things do not need to be imported. But, now they are being exported at an alarming rate as the emerging markets need more and energy sources like ethanol suck up a large piece. The amount of agricultural products staying in the US has been fairly high. Not any more.

While oil prices have been rising, that increase became extremely steep last year and this. The government here is not going to support low gas prices. If anything, the federal and state taxes make the total cost of running a car or truck higher.

As the Fed dumps money into the system to save the financial infrastructure, someone prints money somewhere. Congress is not likely to raise taxes. Running dollar bills of a press inflates buying power, perhaps perversely, but that pressures upward prices nonetheless.

The Fed needs to keep cutting rates to help the US from going into a deeper recession. But, the benefits of that may be terrible.

Douglas A. McIntyre