Thursday, February 3, 2011

Ernie Goss's Statement on Inflation & Interest Rates

I have followed the Goss reports out of Creighton University in Omaha, Nebraska for many years. He surveys bankers, supply managers, realtors and other businesses in a nine-state region including Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota and uses his survey data to compile his Midwestern regional economic reports.

The statement on wholesale prices in his February 1, 2011 report is worth a special post, given his language is on average fairly conservative.

Wholesale Prices: The prices-paid index, which tracks the cost of raw materials and supplies, rose to an inflationary 84.2 from 81.1 in December. This was the fifth time in the past year that the inflation gauge climbed above 80. “Prices for most raw materials, commodities and supplies are increasing at an unsustainable pace. Over the last year, U.S. commodity prices have risen by 6.6 percent driven by a 12.4 percent upturn in fuel prices and a 9.7 percent gain in metal prices. This increase at the producer level will bolster consumer prices well above the Federal Reserve’s target rate of 2 percent sometime in 2011. I expect long-term interest rates to grow rapidly in the second half of 2011 to compensate investors for rising inflation. The Fed is currently keeping long-term interest rates artificially low with their bond buying program, quantitative easing (QE2),” said Goss.

Really, Ernie? Even with QE3 around the next corner?

His statement reminds me of the John Kemp quote I read a few days ago:

In this context, it may not be possible to use fiscal and monetary policy make advanced economies grow much faster and reduce unemployment without triggering big increases in the cost of food, oil and other industrial raw materials. Only increases in productivity, reductions in real wages and incomes, weaker currencies and a shift into higher-value adding businesses can solve the problem of mass under-employment. This is the painful reverse side of globalisation. Emerging markets’ increased integration into the world economy means more competition for resources and employment in the advanced economies, and reduced living standards for households and firms which compete most directly with rivals in developing economies. Globalisation is creating losers as well as winners.

And I thought that that quote made as much sense as anything that I've read in a very long time. It's called ratcheting down. Get used to it.

To read the whole Goss report, go here.
---Kalpa

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