Sunday, February 6, 2011

Economist Magazine Buys the Bernanke Inflation Line

According to Ben Bernanke and his Princeton dance team partner, Paul Krugman, there is nothing to worry about from the current spike in commodity prices.  It's all about greater demand from the BRIC's. Economist magazine has bought deep into this Keynesian two step:
WHEREVER you are reading this article, inflation is probably in the news. Soaring commodity prices are pushing up consumer prices across the globe. The pressure is clearest in fast-growing emerging markets, where people spend a big slice of their incomes on food. China’s inflation rate is hovering around 5%, Brazil’s is approaching 6% and India’s remains close to 10%. Even in enfeebled rich economies the “I” word is back on the front pages. Britain’s consumer prices rose 3.7% in the year to December. Prices in the euro area rose 2.4% over the past year, above the European Central Bank’s goal of 2% or less.

The big worry is that global monetary conditions are far too loose, thanks both to rock-bottom interest rates and bloated central-bank balance-sheets in the rich world and to emerging economies’ inability, or unwillingness, to tighten policy enough in response. This combination suggests inflation could run out of control if left unchecked. Today’s concerns are manifesting themselves in different ways in different places (see article). In emerging markets, politicians fear social unrest and technocrats fret about economies overheating. Inflation jitters are also rising among some central bankers in rich economies, where deflation until recently seemed the bigger threat. Two members of the Bank of England’s policy committee last month voted for an immediate rise in interest rates. A prominent ECB official says increases in Europe’s imported inflation “cannot be ignored”.

Yet central bankers should not be very alarmed either by the scale or by the dynamics of overall inflation. Inflation is up, but hardly high. In no big economy, emerging or rich, is it at the peaks reached in 2008 (in America it is merely 1.5%). Much of its recent rise is driven by what are clearly one-off factors, from weak Russian harvests that sent grain prices soaring to the rise in value-added tax in Britain. Central bankers should ignore such temporary shocks. Their role is to prevent one-off surges from translating into persistently higher pressure on prices.
What the Keynesians fail to look at, including Bernanke, Krugman and Economist, is the roaring price inflation in the stock market.  For the Austrian economists this is key. It shows that while some of the increase in commodity prices may be related to changing supply and demand dynamics (aside from money supply related changes in demand), the money pumping of the Fed is having a very real impact.

For the Austrian economists, money supply pumping always results in increases in capital goods and raw materials first, the consumer price increases trail. Thus, while Keynesians sit content with the, Nixon inspired, core inflation index at low levels, the Austrians sit with their mouths open in total amazement that the Keynesians can't see the consumer price inflation that is about to hit big time.

By mid-2011, it will all be obvious and the Keynesians will have to change their dance step once again.

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