There’s no doubt that commodity inflation is happening all around the world, as our colleague Henry Blodget noted earlier.
Soft commodities, hard commodities, and precious metals have made impressive moves in recent months, helped in large part — it’s believed — by ongoing robust demand in much of the semi-developed world (China, the rest of Asia, India, Brazil), and of course the “growth” in US and Europe.
So when the FOMC meets in the coming week, it should take into account this inflation, right?
What Bernanke and the rest of the FOMC should be concerned with is domestic inflation — inflation that was the result of there being a lack of slack in the US economy. So, for example, if domestic rents, wages, and home prices were back on the march higher, then there’s a good chance that added monetary stimulus would merely serve to push prices higher, rather than help stimulate demand.
Sure, added US demand would also have a further inflationary effect on global commodity markets, but that’s a separate issue from the one facing the FOMC.
Commodity inflation is confusing, but it’s not a monetary phenomenon, and it’s not one that need to distract the FOMC.
This is an important point, because in the summer 2008 (post- Bear Stearns!), the ECB made a classic policy blunder — as the world was careening towards a financial crisis, the ECB raised interest rates in part due to surging oil prices. Obviously, this was soon proven foolish, as the bank eventually backtracked during the crisis, but because of commodity inflation, the ECB took its eye of the ball.
The inflation gauge that actually matters in the US — for all its faults, the CPI — indicates that there really is none out there (and the CPI is probably overstating the inflation, since the full extent of the housing plunge isn’t being captured).