Friday, February 4, 2011

"Goldman kind of disagrees with the Fed on commodities inflation"

First up Real Time Economic with Bernanke's Thursday speech:

Bernanke: Don’t Blame Me for Higher Food Prices
Supply and demand abroad for commodities, not U.S. monetary policy, are causing higher food and energy prices rattling much of the world, Federal Reserve Chairman Ben Bernanke said Thursday.

“The most important development globally is that the world is growing more quickly, particularly in emerging markets,” Bernanke said in response to a question after his speech at the National Press Club.

As economies in Asia grapple with high inflation, Bernanke said constraints on supply — such as bad weather — along with increased demand are to blame for pushing up prices for food commodities.

Strong growth in emerging economies is moving millions of people from poverty to the middle class, changing their eating habits — “more beef and less grains and so on,” Bernanke said....MORE
From FT Alphaville, the headline story:
Well, this is something of a surprise.
Just after Federal Reserve chairman Ben Bernanke told reporters on Thursday that US QE (I and II) does not cause higher food prices in places such as Egypt, Goldman Sachs’ Michael Vaknin publishes a note suggesting something rather different.
Bernanke’s argument, by the way, is that increased commodities inflation in the emerging world reflects the growing wealth of EM populations and, in some countries, a failure to tackle inflation through their own monetary policy or by adjusting exchange rates.
But, over to Vaknin’s Friday note:
… Can we dismiss the risk of a persistent rally in commodity markets? After all, with the exception of the crisis period, commodity futures have persistently under-estimated the rally since 2002 (by roughly 20% each year in the case of WTI). This is quite striking because during the 80s and 90s commodity price shocks were clearly transitory and tended to mean-revert quite fast....MORE, read it.
Finally a trip down memory lane to the Chairman's Nov. 5, 2010 at Jacksonville University:

Big Banks, Bernanke and QE2 and Commodities
In his November 5, 2010 lecture at Jacksonville University the Chairman downplayed the then recent spike in commodity prices. Here's the video via C-Span...
...Specifically, during the Q&A at the 15:31 mark he is asked:
Unidentified speaker:

Thank you for coming. You have mentioned that the Federal reserve sees an extended time of low inflation that could threaten the economy. I see commodity...
"You're absolutely right that the one exception to the general observation that inflation has been coming down is that globally traded commodities like energy and food and other commodities have been going up pretty sharply, and the reason for that basically is because the supply and demand is determined on a global level and emerging markets are growing quite quickly and the demand for those commodities is pretty strong. So that is going to be a contributor to inflation in the U.S. because it will affect for example gas prices and so on.

Our research and our experience though suggests that generally speaking when you have a situation like we have today where there's a lot of slack in the economy, a lot of excess supply, that it's very very difficult as you were saying for producers to push through those costs to the final consumer. In addition, most of the costs that producers have are labor costs, and wages have been growing relatively slowly. Productivity has been growing relatively strongly which means that overall the cost of labor per unit of production is in some cases actually falling. So although you have higher materials costs or higher energy costs you have lower labor costs. So you put that all together and you don't expect to see very much inflation, or... commodity prices being passed through to final goods and services with a few obvious exceptions like gasoline of course".
Here's a different take on things from Economic Forecasts and Opinions...MORE