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Home Publications Blogs Beat the Press The Inflation that Concerns the Fed Does Not First Affect Food and Energy Prices

The Inflation that Concerns the Fed Does Not First Affect Food and Energy Prices

Friday, 14 September 2012 05:16

In an article on the Fed's decision to buy more bonds and to extend its commitment to a low interest rate policy, the Washington Post told readers:

"Fed officials have been sympathetic to concerns about inflation, which would first affect middle-class purchases of necessities such as food and gas."

Actually, inflation in food and gas prices is of the least concern to the Fed because they are largely out of its control. The price of food and gas are determined in international markets. When these prices have risen it has been primarily because of rapid growth in demand in developing countries like China and India, or reductions in supply due to political disruptions or weather. (In many cases the price rises were amplified by speculation.)

The Fed's actions will do little to affect worldwide demand for these products and therefore will have little effect on the price of food and gas. This is why the Fed generally looks at the core inflation rate, which excludes food and energy prices, in designing policy. The non-core components are both much more volatile and outside of the Fed's control.

This piece also inaccurately asserts that the labor market has been worsening over the last three months because the economy has only been generating 100,000 jobs a month. The piece claims that it needs 120,000 jobs a month to keep pace with the growth of the labor market. In fact, the Congressional Budget Office projects labor force growth of 0.7 percent a year. This would imply that a growth rate of 90,000 jobs a month is sufficient to keep pace with the growth of the labor force. By this measure, job growth has just been keeping pace with the rate of growth of the labor force.

Comments (17)Add Comment
International Commodity Markets
written by Tom, September 14, 2012 10:12
Surely though since these international markets (the market for oil for instance) are conducted in US dollars if the supply of dollars goes up relative to the supply of the commodity, then relative price of the commodity in terms of dollars must raise. I am confused then -- are you saying the Fed's QE actions do not increase the supply of dollars in a meaningful way?
Oil and Food Prices Have Risen Against ALL Currencies
written by Dean, September 14, 2012 10:23

the fact that items are often (not always) prices in dollars is irrelevant. It is just a unit of account. The price of these commodities has risen measured in euros,yuan and other currencies also. It is not an issue of the dollar falling in value relative to other currencies, although it would certainly be a good thing if it did. That would give us the boost to our net exports that we need to move back to full employment.
wage inflation
written by bakho, September 14, 2012 11:05
The inflation the Fed usually worries about is wage inflation and wage-price spirals. Wage-price spirals are unlikely to form with with unemployment over 8 percent.

In fact, wages for the Middle Class have been stagnant or deflating over the past decade. More wage inflation would stimulate demand and help repair the balance sheets from the loss of wealth due to the housing bubble and the unemployment bubble.
written by skeptonomist, September 14, 2012 11:40
If prices rise because of a shortage of oil or grain, the Fed will feel the pressure, whatever Fed officials or economists say. Will the Fed be able to resist it? Remember, Bernanke's term is up in January 2014. If there is headline inflation but not core inflation, and he does not react and increase interest rates, will he keep his job? In fact, in the 70's the Fed reacted to headline inflation, not core inflation, and many economists still claim the reaction was inadequate.
inflation, demand, prices, wages....
written by pete, September 14, 2012 11:43
to get wage inflation without price inflation is kind of weird...this would be essentially a mistake with 20% real unemployment, to get somehow firms to pay more money...the goal of QE on the other hand is to get prices to rise faster than wages so that firms will be able to increase profits and hire more folks. this has worked since 1972 quite well, real wages are relatively stagnant, the stock market has done well. yesterdays stock market reaction was clear...QE is perceived to be good for business...
QE IS the cause of higher commodity prices
written by Mike_in_FL, September 14, 2012 12:11
I am so sick and tired of the rise in commodity prices being blamed on wars, weather, Martians, or everything else BUT cheap money. QE IS the major cause of commodity price spikes and it's high time we stop pretending it isn't.

Case in point: On the day Bernanke unveiled his latest gambit, stock prices rose. He bragged about that in the press conference after the meeting. But almost tick for tick with stocks, the prices of corn, soybeans, wheat, copper, crude oil, gold, silver, etc., etc. all shot up. Since the first hints of QE were dropped a month ago, the same pattern has occurred.

Are we supposed to believe the Fed's bogus explanation, therefore, that its policy is responsible for "good" asset inflation (in stocks) but not "bad" asset inflation (in commodities)? Anybody who does is so out of touch with the real world that I can't help him.

The reality is, QE is ultimately a DESTRUCTIVE policy that helps Goldman Sachs bankers who can profit from rising stock and commodity prices, while shafting the majority of America with higher cost of living. And as for creating jobs? Only the Fed's internal models seem to show much of an impact. This is my surprised face :l
Thanks, Dean
written by Tom, September 14, 2012 12:20
Thanks for your answer, Dean. But if the dollar falls in value relative to commodities, isn't that essentially the same thing as inflation to a non-economist? If we double the amount of dollars but leave the supply of a given commodity fixed, the price we pay in dollars for a unit of the commodity should double... do I have that right?
written by John Q, September 14, 2012 12:33
Brad DeLong today reminds us Ritholtz's this take down of a WaPo column published four years ago, adding this comment:
"...publishing this piece alone makes it a sin to pay money to the Washington Post corporation for any reason"

Sorry - bad proof reading - corrected now
written by John Q, September 14, 2012 12:38
written by John Q, September 14, 2012 12:33
Brad DeLong today reminds us of Ritholtz's take down of a WaPo column published four years ago, adding this comment:
"...publishing this piece alone makes it a sin to pay money to the Washington Post corporation for any reason"

written by skeptonomist, September 14, 2012 1:29
Yes, if the dollar is devalued that means US consumers will pay more for foreign goods, including oil - but foreigners will pay less for US goods. So when Dean Baker, Krugman or anyone else calls for a lower dollar value he is calling for inflation for US consumers. But this should result - eventually - in more jobs as prices of US goods go down for foreigners. So this policy is price pain first, jobs later.

And Dean is dead wrong when he says that wages tend to keep up with inflation - here is growth of real wages for production workers since 1915:


Especially since the 60's inflation has usually caused severe loss in real wages. This might have been learned from Keynes: "Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labor whenever there is a rise in the price of wage-goods." and "[workers] do not resist reduction of real wages [as a result of inflation]" (General Theory, Ch. 2, p. 9; p 14).

Inflation and Real Wages
written by Dean, September 14, 2012 1:46

I am not denying that inflation is the mechanism through which real wages fall -- nominal wages rarely decline -- the question is whether more inflation means sharper declines in real wages. If you look at the last decade, we mostly had very low inflation, yet declining real wages. In the 60s, we had modest inflation and very strong real wage growth. In the late 90s we also had modest inflation and strong real wage growth. You simply will not find any evidence to support a story that lower inflation is associated with higher real wage growth.


i'm sorry if the truth gets you sick. Commodity prices peaked in early 2008 before Bernanke had done any QE. For most commodities we have not gotten back to that level regardless of how much QE Bernanke has done.

You can blame Goldman Sachs for lots of things but the data just doesn't fit here. When oil gets pulled off line because of a revolution in Libya there would seem to be something that would raise its price. That might make you sick, but there's not much we can do about that fact.
theory vs. reality
written by Mike_in_FL, September 14, 2012 2:28
Thank you for your reponse, even if I disagree. Theory is one thing but practice is another. Did some brand new supply disruption occur at 12:35 p.m. EST yesterday when oil futures prices stopped falling and started shooting higher (we breached $100 a barrel in WTI today)? Did emerging market growth suddenly ramp up at 12:30 yesterday, when copper futures started ripping higher? Of course not!

And it's not just one day's trading. Look at the charts of virtually every commodity on the planet going back to mid-August when QE hints started to be dropped by the Fed and the reporters it spoon feeds with information (a la Hilsenrath at the WSJ). They all rose in virtual lock step with the stock market. We have seen this pattern play out over and over and over again, with "bad" asset classes like commodities riding the very same QE on/QE off waves as "good" assets like stocks.

Bernanke cannot simply claim he's responsible for one and not the other. That may not fit with theory. But it is the reality witnessed in the market every single day. This is why QE continually fails to produce lasting improvement in the job market or economy. Yes, the top tier of the economy makes money when their stocks go up. But the rest of America gets stuck with disposable income destruction. Witness how average hourly earnings -- adjusted for inflation -- plunged 0.7% in August, the biggest monthly decline since mid 2009.

Monetary policy/money printing is not a successful policy when it comes to doing anything but pad Wall Street end of year bonuses. So I don't understand why the heck we would want more of it?
tens of millions of people have refinanced mortgages
written by Dean, September 14, 2012 2:36
Mike_in _Fl,

actually there have been some events in the Middle East that would cause concern about oil prices. But looking at the longer term trend, which is all us normal gas consumers would worry about, there has been no upward pattern in prices since the QEs have been announced. On the other hand, tens of millions of people have refinanced mortgages at lower interest rates. If these folks are all one percenters, that group has radically expanded.
qe, does it help the poor, working people or the lower middle class?
written by mel in oregon, September 14, 2012 4:12
nope, only the wealthy & the stock market. it won't create jobs. wages & salaries adjusted for inflation are actually lower than they were 40 years ago. the economy cannot improve without radical changes, which have no chance of being implemented. you would have to move to a real socialist economy & nationalize banks & the wallstreet financial corporations to ever escape the mess we are in. course it's not doable or even thinkable. so both parties are toadies for the pentagon, wallstreet & outsourcing corporations. nothing's gonna change, so eat, drink & be merry. everyone have a nice weekend.
re: Mike_in_Fl
written by 99 tries, September 14, 2012 7:53
QE enabled re-fi's? Not the low fed rate? How did you parse the relative impact of each on the re-fi market?
written by skeptonomist, September 15, 2012 10:03
I tend to agree that more inflation would probably be a good thing at the moment, but this depends very much on what causes the inflation. During WW II wages went very high because of a shortage of labor. There was inflation, but this did not really harm either workers or the economy - and the Fed did not try to prevent it with interest-rate raises. In the 70's inflation was caused by commodity-price increases and the Fed's response was to increase unemployment; this resulted in a huge decrease in real wages. I would not count on the Fed refraining from repeating this performance if there is a middle-eastern war (for example) and headline inflation shoots up again.

The Fed's unprecedented attempt to expand the money supply in the latest recession has not resulted in inflation (QE? won't do it either) and monetary-policy supporters are reduced to the magic incantational effects of the Fed promising not to rates rates ever, ever again (or at least until its personnel or policies change). What is really needed is getting money directly into the hands of workers and unemployed and this is not something that the Fed does. In Europe, what would really be beneficial is raising wages in Germany; overall inflation would do this only indirectly and is probably not in the power of the ECB.
Commodity prices
written by Tom, September 16, 2012 9:34

Do you not agree that if the supply of dollars increases increases, the in-dollars price of a commodity in fixed supply should rise as well? If so, the only way I can make sense of what you are saying is that QE is not actually increasing the money supply.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.