Wednesday, March 12, 2008

Rogoff on Inflation

Ken Rogoff thinks the world's central bankers (and particularly the US Federal Reserve) need a reality check on inflation (HT: Greg Mankiw):

Many central bankers and economists argue that today's rising global inflation is just a temporary aberration, driven by soaring prices for food, fuel, and other commodities. True, prices for many key commodities are up 25 percent to 50 percent since the start of the year.

But if central bankers think that today's inflation is simply the product of short-term resource scarcities as opposed to lax monetary policy, they are mistaken.

The fact is that around most of the world, inflation ― and eventually inflation expectations ― will keep climbing unless central banks start tightening their monetary policies.

The U.S. is now ground zero for global inflation. Faced with a vicious combination of collapsing housing prices and imploding credit markets, the Fed has been aggressively cutting interest rates to try to stave off a recession.

But even if the Fed does not admit it in its forecasts, the price of this ``insurance policy" will almost certainly be higher inflation down the road, and perhaps for several years.

That's not a pleasant thought, but it's probably accurate. Inflation is created by central banks and they have been inflating their butts off for the last 9 months trying to avoid a recession. And it's not working.

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