Continuing Upside Risks to Inflation

Here’s the key inflation paragraph from yesterday’s Fed minutes

"Participants noted that, while the pass-through of higher energy and other commodity prices to prices of core goods and services had remained subdued, there were continuing upside risks to inflation from these sources. Whatever the size of such pass-through effects, however, it was thought that they would probably be temporary in nature and likely diminish as energy prices flattened out, as long as inflation expectations did not move higher. In that regard, participants were encouraged that, despite recent energy price increases, survey measures of inflation expectations had notched down and longer-term inflation compensation in financial markets was little changed. Although high profit margins could imply some existing pricing power, they might also provide a cushion to absorb some future cost increases. Indeed, anecdotal reports suggested that the ability of firms to pass through higher input costs generally remained limited. Nevertheless, the increased prices of energy and other commodities and the possibility of a further rise in resource utilization, which some members viewed as nearly full at present, represented continuing risks, potentially adding to inflation pressures."
(emphasis added)

By now, you should know my views on the subject . . .


Minutes of the Federal Open Market Committee
FRB, January 31, 2006

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  1. GRL commented on Feb 22

    The fundamental bottom line is that, perhaps due in part to loose montary policy, the cost of a middle class lifestyle has outstripped the ability of a middle class family to afford it.

    One other observation is in order: It seems to me that, with the possible exception of energy, the areas of greatest price inflation are those areas in which the government has intervened by way of regulation or subsidy, to try to make the good or service in question more affordable, for example:
    Housing — Government subsidized loans and loan guarantees.
    Education — Government provided and subsidized student loans and grants
    Healthcare — Medicaid and a plethora of rules and regulations designed to make sure everyone has reasonable access to health care at a “fair price.”
    Property and casualty insurance — Extremely heavy regulation by the states.
    Taxes — Need I say more?
    These are the areas where government policies are designed to help, or make life more fair for, consumers. In the areas where government policy is designed to protect producers, i.e., farm price supports, government policy has made it impossible for producers to make a living without government subsidies.

    Obviously, these off the top of my head observations need a lot more research if they are to be validated. However, it is research that someone needs to do, because, if they turn out to be true, they suggest a policy response to the “middle class squeeze” which is radically different from the one we are likely to get.

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