Study Says Fed Does Not Need to React to Inflation Caused by Commodity Prices

April 11th, 2011
in econ_news

Econintersect: A Chicago Federal Reserve study suggests that commodity price increases do not require a monetary policy response to fight inflation from the Federal Reserve.  The study concluded:

Moreover, at least in the case of oil, price increases tend to slow the economy even without any policy rate increases. Of course, if commodity and energy prices were to lead to a general expectation of a broader increase in inflation, more substantial policy rate increases would be justified. But assuming there is a generally high degree of central-bank credibility, there is no reason for such expectations to develop—in fact, in the post-Volcker period, there have been no signs that they typically do.

Follow up:

In simple words, commodity price increases slow the economy in turn forcing down commodity prices.  This correlates with a Bank of Tokyo Mitsubishi UFJ report which states:

Taking a look at historical data back to the 1970’s and relating the energy component of the consumer price index to growth in real consumer spending we can see that a 10 percent annualized growth rate in the 3-month moving average of the CPI for energy appears to be a trigger for a pullback in spending.

Currently, the CPI energy price index is up 10% suggesting a consumer pullback may be underway.   Econintersect has produced a study for release this weekend showing recessions in the past triggered by rising commodity prices.

The concern of rising prices is not only inflation, but also recessing the economy.

source: Federal Reserve

 









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1 comment

  1. D.B. Clark Email says :

    I would agree that demand will soften at high(er) energy inflation levels.

    Classic to see the Fed QE liquidity pump the energy asset prices up (risk assets) - creating a recessionary reduction in aggregate demand.

    Classic isn't the word - unbelievable a better description.





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