Some analysts place blame for today’s global problems at the feet of Federal Reserve Chairman Ben Bernanke, an appointee of former President George W. Bush. The nation’s chief banker is in hot water for purportedly creating worldwide inflation, which led to revolutions in Arab countries.
Even without this geopolitical blame, Bernanke is frequently forced to defend U.S. monetary policy in front of world and national leaders.
Bernanke argues in part that strong demand in emerging markets such as China is the main cause of rising prices. But as all economists know, supply matters as well.
On the demand side, the low interest rate of easy monetary policy leads to inflation — a rise in the price of all goods and services. This happens when more money chases the same quantity of goods and services.
However, not all prices are rising fast. The so-called core inflation, or the rate of price increases for goods and services minus food and energy costs, is rising relatively slowly.
This sub-index of the price level is less volatile and more predictive over the long run. The U.S. Bureau of Labor statistics report that from December 1982 to December 2010 the overall price index and the core index rose at nearly the same annual rate, 2.93 and 2.99 percent, respectively.
Yes, food and energy prices are up, but the prices of many other regularly purchased consumer goods continue to fall. For example, video and audio prices are 2.6 percent lower, and personal computer prices have fallen 6.9 percent over the past year.
We also are not seeing much inflation in the Treasure Valley. The Consumer Price Index for western cities the size of Boise is up only 1.2 percent over the last 12 months compared to an average rate of 1.8 percent in cities nationwide.
Supply factors are responsible for a good part of the global inflationary pressures on food and energy prices. Following a lengthy recession, farmers are not planting much and energy firms are not drilling more.
The U.S. Department of Agriculture reports that since 2008, the world supply of major grains has grown 2 percent while demand rose twice that at nearly 4 percent.
The U.S. Department of Energy reports that world oil production is at about the same level as it was in 2005.
Even Asia’s inflation problems are due, at least in part, to supply problems. India’s finance minister reportedly said that bottlenecks in the farm sector are “crippling supply.” To help slow the rise in prices, the government there plans new investments in agriculture productivity and storage facilities.
If Bernanke’s monetary policy is not to blame for today’s problems, where should policymakers focus their efforts?
The National Association for Business Economics lists the budget deficit as the most important issue today. High unemployment rates and inflation pressures are seen as lower priorities. The high national debt is an impediment to long-run economic growth.
Even if attention turns away from monetary policy and back to the deficit, we may still hear, “Bush did it.”