As we emerge from the "Great Recession" there has been increasing debate about the issue of
inflation. Although our economy seems to be strengthening, and core inflation is at a healthy 1.6%* year over year from January 2010 there seems to be a missing piece to the puzzle.
I stumbled across this article on Yahoo Finance which highlights the disconnect between the Fed's claims that core inflation has been kept in check, and consumers who are feeling pinched by rising prices.
http://finance.yahoo.com/news/Dudley-signals-Fed-wont-rb-3386698662.html?x=0&sec=topStories&pos=3&asset=&ccode=
It is understandable that core inflation calculations weigh commodities (such as energy and food) less than certain discretionary goods and wages due to their sensitivity to market volatility. However, when commodities are speculated on or experience increased volatility from geo-political tension it would seem that the upward pressure on prices for necessities should be addressed.
Apparently I wasn't the only one to notice this as the following article was posted to Yahoo hours later:
http://finance.yahoo.com/news/iPad-price-remark-gets-Feds-rb-734103427.html?x=0&sec=topStories&pos=7&asset=&ccode=
For months now I have been speculating that inflation will become a major issue in the near future. When we consider food and energy alone, which according to www.visualeconomics.com are roughly 25% of the average consumers budget, it shows the impact that recent increases in gas prices (14% in the past month**) will have on the average consumer's disposable income. It can also be argued that the rising prices of essential goods will effect the middle and lower classes disproportionately as increases in these costs will drastically cut into their discretionary spending.
In my opinion, the Fed should have already begun slowly raising interest rates from their historic lows . Although this would cause some short term economic pain, it almost certainly would help us avoid a period of soaring inflation as we had in the 1980's. While I am not advocating sharp raises in interest rates, which may be unavoidable if core inflation skyrockets, being proactive in curbing future inflation will lead to a more stable long term recovery.
As a final thought, I do realize this may have a negative impact on the housing market and some small business lending (although credit is not easy to come by despite record low interest rates), but in the end some slight restraint now may help us avoid another financial crisis in the not too distant future.
As always, any feedback and discussing is welcomed...till next time
*http://www.bls.gov/cpi/
**http://fuelgaugereport.aaa.com/?redirectto=http://fuelgaugereport.opisnet.com/index.asp
If the housing recovery is key to any recovery, and a 1 point rise in rates cuts down your buying power by 10%, then housing and commercial RE prices would get rocked by any significant upward movement in rates right now (without solid employment improvement)....at least i think this is why the FED is not moving rates even though they can't deny the changes you mention above.
ReplyDeleteI agree that I'd start considering a rate increase STAT.
Excellent point, I have 2 follow up questions for the sake of argument:
ReplyDelete1) Is artificially propping up the housing market by keeping rates low going to help our economy in the long run?
2) Furthermore, is an economy that is based predominantly on housing and consumer spending sustainable?