SF Fed President Blames Everything But Fed Money Printing for Inflation

Price increases are getting too big to ignore, so Fed apologists must now recognize, when they discuss price inflation, that it is significant, as did San Francisco Fed President  John C. Williams, who spoke today at a Los Angeles Town Hall meeting. But then they attempt to down play the inflation. He said:

Regarding the first question, we’ve seen a very substantial pickup in prices for many energy, food, and industrial commodities. For example, in the past year, copper prices have risen 26 percent, crude oil 35 percent, and corn 75 percent.3 This is cause for serious concern. Sharply higher prices for many raw materials are driving up the prices of a range of consumer goods and services, including gas and food, and are pushing readings of overall inflation noticeably higher. The measure of prices that we at the Fed tend to watch most closely—the personal consumption expenditures price index—increased at a 3.8 percent annual rate in the first quarter of this year. This figure is well above the longer-term inflation objective of 2 percent, or a bit less, that most participants in our policymaking body, the Federal Open Market Committee, prefer.

But he blame everything but Fed money printing for the climbing prices:

This brings me to the second question: What is driving inflation so high?...

I see the real culprit as being global supply and demand. Rising commodity prices can be traced to the rapid rebound in the global economy in the past year and a half, led by robust growth in emerging market economies, which display a ravenous appetite for raw materials. For example, Chinese automakers sold some 18 million vehicles last year, a third more than in 2009 and more than any other country in history, including the United States. At the same time, as demand is rising, we’ve seen supplies of some commodities curtailed by weather or political disruptions. In recent months, turmoil in North Africa and the Middle East has reduced the global supply of oil and likely added a substantial risk premium to the price of a barrel of crude as well.

What do these fast-rising commodity prices mean for inflation for the rest of the year and beyond? I believe that the inflation rate will reach a peak around the middle of this year and then edge back downward. In other words, we are seeing a temporary bulge in inflation before we return to an underlying level of about 1¼ to 1½ percent annually. There are several reasons for thinking the inflation bulge will be short-lived. First, commodity prices are not likely to keep increasing indefinitely at a rapid rate. Indeed, in recent weeks, prices for a number of commodities, including sugar and cotton, have fallen sharply. In addition, the prices of contracts for certain key commodities in the futures markets, such as crude oil, indicate that traders believe these prices won’t keep rising at double-digit rates. For example, the numerous supply disruptions that have pushed up prices of some foodstuffs, such as poor harvests in Russia and China, are not likely to be repeated. So even if commodity prices remain elevated, they won’t keep pushing up inflation.

A second reason for believing that inflation will peak and then trend down is that higher commodity prices generally represent only a small proportion of the cost of the finished goods American consumers buy. For example, corn and sugar make up only a fraction of the cost of a box of Frosted Flakes. Most of the cost comes from the labor involved in manufacturing, distributing, and selling the breakfast cereal, including paying for air time for Tony the Tiger. This means that large percentage increases in commodity prices typically translate into relatively small percentage increases in consumer prices. Of course, some goods, such as gasoline, have very high commodity input shares. But, in today’s economy, these are more the exception than the rule.

The stability of longer-term inflation expectations is a third factor that leads me to expect that inflation will start to ease later this year...

He then admited that he has really no clue as to what really is going to happen:

I recognize that this forecast could prove wrong, and we will be paying very close attention to incoming information to watch for shifts in inflation trends. If inflation significantly exceeds our forecast, if commodity prices do not stabilize, if the pass-through of commodity and other import prices to consumer prices is higher than we expect, if long-term inflation expectations start rising significantly, or if a wage–price spiral starts to emerge, then I will modify my views accordingly.

But what he never does is discuss the size of Fed money supply growth or the role Fed money printing has in pushing prices higher.

I have never disputed the fact that some of the increase in prices is coming as a result of greater demand from the BRICs, but it is outrageous not to consider that Fed money printing is playing a role. It is particularly outrageous that this causal factor is not even discussed by a a Fed president, when he is discussing inflation.

The only question that remains is whether Williams is clueless or intentionally excluding a discussion of money supply growth when he speaks on price inflation.