The Great Inflation Cover-Up?
The problem is quite simply this - there is inflation in oil, thanks to the dollar declining, and food, thanks to the 2007 Clean Energy Act, which encourages production of ethanol. (See Has the American Dream Become a Nightmare?)
There is, unfortunately, deflation in housing prices and Wall St. asset-backed commodities and, therefore, Wall Street firms, such as Bear Stearns. So the Fed is faced with fighting inflation and deflation at the same time.
At this point the Fed is more concerned with preventing an all-out financial rout on Wall Street, which would lead to a global recession. Once that filters out, (probably Q3) then the Fed can refocus on inflation in food and oil.
The Fed pays attention to non-core CPI as well as core CPI. It just isn't as much of a concern right now as total financial meltdown.
There doesn't appear to be an inflation cover-up. Instead, the Fed is just following the age-old rule - "Fight the demon that will kill you fastest."
What It Means to You
Unfortunately, it means you need to be concerned about both recession AND inflation. This is not stagflation, because there is deflation in housing and the stock market AND there are still low interest rates. This is good news, because true 1970's style stagflation would mean we are in for a long haul of low growth and high prices. (See Could Stagflation Reoccur?)Instead, a gradually slowing global economy should mean somewhat lower food and oil prices later this year. Lower interest rates will mean a return to growth in 2009. Although it will be a long time before housing prices return to 2006 levels, the housing market should start to pick up again in 2009.
“The problem is quite simply this – there is inflation in oil, thanks to the dollar declining, and food, thanks to the 2007 Clean Energy Act, which encourages production of ethanol.”
Does this mean that the weak dollar which you say is effecting oil prices has no effect on food prices? What about higher energy costs? If ethanol production was ended would corn prices go back to the $2 a bushel it was at in early 2006 even though diesel prices and fertilizer prices have gone up? Does the record export levels for most all commodities have an effect on food prices? What about higher labor costs due to the minimum wage increase last year?
Most of the articles I have read have attributed the dramatic increase in food costs to the increased production of ethanol.
However, you are correct to point out there are other factors, such as higher oil prices and demand from developing countries.
I have collected the information for, but haven’t yet written, an article that discusses this in more detail.
Kimberly