“Fed and BCE: The Differential Is Dollar Negative, Period” – FXStreet
“Most central banks chose to ignore commodity prices, like food and oil, because (1) they are overly volatile and (2) a central bank can’t take any countervailing action. Almost every sensible person who actually buys gasoline and food—which central bank chiefs do not–has a real problem with this attitude. For one thing, commodity prices move in a trended way. They may be volatile, but they are volatile around the same sloped trendlines as other financial market prices, like FX rates. To deny the trendedness of commodity prices is to deny all trendedness, and that is to ignore the evidence ofyour eyes and of history.
The Economist, as reported above, says the ECB rate hike is premature because core inflation is okay near 1% and it’s headline inflation that is over the 2% cap, not enough justification to see inflation lurking in the shadows. But Germany has low unemployment under 8% and unionized workers who buy gasoline and groceries—the second-round effect may not be far off. Strict monetarists say it’s not commodity price rises that cause inflation, it’s increases in money supply growing faster than economic activity—the famous Fisher equation of MV = PT. And yet we all remember the oil embargo of 1973 and supply issues in 1978 and then inflation at 15% in 1979—to say there is no connection is silly. That so much of the US money supply is literally sloshing around overseas introduces a factor into the Fisher equation that Fisher did not account for. This is wildly oversimplified, of course, but a key truth.” Read more.
“Fed and BCE: The Differential Is Dollar Negative, Period”
Barbara Rockefeller
FXStreet.com, April 4, 2011.
Image by chrisroll / FreeDigitalPhotos.net.
