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Born at the Crest of the Empire

Wednesday, October 05, 2005

Just a quick Econ 101 lesson on inflation.

This has been making the rounds, and it's not a good sign.

US inflation is running close to the Federal Reserve's danger zone, Dallas Fed president Richard Fisher said, in comments that suggest the central bank will keep hiking interest rates.

Another Fed official said policymakers would be alert to "surprises" in inflation.

After hurricanes Katrina and Rita, price pressures are mounting as energy gets more expensive and businesses pass on their higher costs to customers, Fisher said in a speech in Dallas, Texas.

I will leave out the implications of inflation to our personal and economic well being, and focus instead on its source. Yes, rising energy costs are going to play a big role in rising inflation, but don't forget the other component, a huge national budget deficit. The US government, with the already planned deficit plus the Katrina costs, is probably going to spend 400-500 billion dollars more than it takes in this year. This increases the amount of debt that must be sold on the world markets and depresses the value of the dollar.

Quite frankly, this will not be the major component of inflation, rising fuel prices will claim that role, but we should not forget that the cut taxes and spend policies will have an impact on a weaker dollar which means you can buy less for that dollar.


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