With the CRB index now at the highest level since Sept ’08, led of course by food and energy prices, every central banker around the world, particularly at the Fed, has to ask themselves, what is the precursor to a healthy economy, price stability or cheap money (negative real interest rates). Will central bankers respond to higher inflation pressures with rate hikes or will they fear that higher inflation will slow economic growth and keep policy easy and thus potentially further spur higher inflation? Fed policy is certainly extraordinarily easy but other central bankers have their benchmark rates below their levels of inflation, the BoE, ECB, PBOC, BoC and BoK to name a few. Australia and Brazil are the only major economies that have a central bank with positive real interest rates. We’ll hear from Bernanke tomorrow and China says that they want 7% growth instead of something more because of the instability inflation causes.
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