The Perils Of Ignoring Inflation

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The Federal Reserve says it has inflation under control. More and more economic data says that is not true.

Wheat, copper, and gold prices are at or near all-time highs. The head of huge commodities trading house Bunge told the FT that grain prices will continue to move higher.

Inflation has begun to harm the economy in Vietnam according to a number of reports. GDP growth in the Asian nation has gone above 7%. That trails China, but is still an impressive figure as most of the world has just come out of a recession.

China, like the Fed, claims it can keep inflation at a reasonable level. It has tightened the availability of money. It is not clear whether this can offset the demand for raw goods in its manufacturing sector and the movement for higher wages among factory workers.

No one and no government has been able to effectively keep prices across many sectors of the economy from moving higher. The hope now is that these increases will not reach the retail level. That is no more than whistling past the graveyard. Businesses across many industries and across the world have no choice other than to test consumer and enterprise demand for higher prices. Otherwise margins will be compressed so severely that in many cases positive spreads between wholesale and retail prices will become negative ones. That profit pressure could easily cause the cost cuts that go with corporate losses. Jobs and investments by firms that cannot pass along prices will get sacrificed.

Inflation may be nearly inevitable now. The scarcity of certain important agricultural commodities is real. The rise in the prices for these is not merely due to speculative trading by financiers who hope to make profits. The same case seems true for crude oil. Demand in China and the balance of the developing world is mostly higher. OPEC has no plans to increase production. A cold winter may further tax reserves.

The inflation pressure will become more of a vise for companies that still face consumers and businesses that cannot afford higher price goods because they have not recovered entirely from the recession. The profits that are bound to be undermined by that pressure may be as large a threat to the economic recovery as anything else.

Douglas A. McIntyre