Trend: Energy prices at the consumer level climbed 17% in 2007; food prices rose 4.9%.
The Consumer Price Index currently excludes food and energy. Jim Jubak at MSN Money says that inflation from these two sources isn't likely to go down if the U.S. economy slows because so much of the demand comes from fast-growing China, India and the Middle East. Excepts below.
Is the Fed willing to risk high real inflation to avoid a recession? If so, people with cash savings may have to adjust accordingly.
Link: The Fed isn't fooling anyone - MSN Money.
We've seen interest rates drop and drop again in 2007 and early 2008. I think we're likely to see more rate cuts in the next few months as the Federal Reserve tries to stabilize plunging home prices. William Gross, the fixed-income guru at Pimco, says the Fed might take short-term interest rates as low as 2.5% to drive long-term mortgage rates low enough to rescue home prices.
Doesn't all of that -- higher economic growth, a flood of cash into the economy, slashes in interest rates -- create a massive inflationary push in 2009?
Absolutely, unless the Federal Reserve is counting on a global collapse in oil prices or economic growth to reduce global energy inflation and global demand for food and raw materials. But frankly, it's hard to see oil prices falling or the global economy stumbling if the Federal Reserve is able to reverse the decline in U.S. economic growth.
So, in 2009, we face a big problem and a difficult choice. We can ignore rising inflation because the U.S. economic recovery is still fragile, which risks letting inflation build momentum and makes it harder to fight in the future. Or we can raise interest rates to fight inflation and risk stalling the U.S. economic recovery.
The Fed doesn't have a great track record at that kind of decision. In the aftermath of the stock market bubble in 2000, Alan Greenspan's Federal Reserve took interest rates down to 1% to stabilize the financial markets and the economy. But then it left interest rates too low for too long, and that created the housing-market bubble. Will the Bernanke Fed do any better at handling the very tricky turn from an easy-money policy that supports the economy to a monetary tightening that prevents higher inflation and a new asset-market bubble?
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