Wednesday, March 02, 2011

Fear of Inflation

Again as the price of oil goes up, and the price of all things that depend on it climb as well, I see politicians and central bankers crying out about inflation. At the moment there is little need for inflation controls outside of a handful of developing economies (for instance China).

Yes the price of oil is going up. But this time almost everyone agrees the reason is temporary in the long term. Yes this drives up the costs of transportation and many commodities. But what inflation hawks don't seem to take into account is that by diverting more capital to fuel costs the rise in oil prices already acts as a brake on the economy. Companies and people alike will have to adjust their budgets to deal with the rise in fuel costs, and that will slow demand on other resources cooling the economy. The market will handle this.

I am glad to see that at least Bernanke agrees. This is not the time to apply panic braking to the economy in the developed world. Raising interest rates at the moment would be like pulling the emergency break on the economy.
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