Thursday, July 03, 2008

Inflation in a Global Economy

Concerned about inflation, the European Central Bank raised its interest rates today despite the fact that the German and French economies are showing weakness. What good does that do in a global economy? If inflation is driven by global demands for goods, such as steel, how does it help reduce inflation by raising the interest rates in any one particular country? I don't get it. Here's a little bit more from that article.

Surging food and oil prices are buffeting central banks globally. In recent weeks, U.S. Federal Reserve policy makers have ratcheted up their anti-inflation rhetoric. However, because the economy remains fragile, the Fed is not expected to raise its key rate from its current 2% until later this year unless the inflation outlook deteriorates considerably.
Oil and food prices are globally set, right? Hmmm.

32 comments:

B-Daddy said...

KT,
Although oil and food prices have a global component, their price is measured in a currency that is more or less a local matter. When one considers price inflation for a particular good, one might wish to consider its relative scarcity compared to goods in general, and the relative availability of the currency. If the value of the dollar falls as measured against other currencies or the price of gold, a more traditional currency, then why wouldn't the price of oil increase. If I have some time, I might try to plot the price of oil divided by the price of gold over the last five years. My suspicion is that we might get a flat line.

So here is the quick analysis:
Ratio of barrel of oil price to ounce of gold price:
2004: .092
2005: .113
2006: .097
2007: .092
2008: .140

While the ratio did run up in 2008, it is nothing like the trebling in dollar denominated cost.
You can fact check my sources for oil prices and gold prices. This analysis was a little BOTE, but makes the point that I believe it is the dollar losing value that is the culprit.

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