Friday, November 04, 2005

Jim Jubak takes on the Fed

Jim Jubak, a columnist for MSN Money , has a very interesting take on the Fed's policy of increasing interest rates to combat inflation. According to him, the Fed has gotten it all wrong this time around. Here's my favorite passage from his article.

"The Federal Reserve is fighting the wrong kind of inflation. The classic monetary remedy for inflation is higher interest rates -- that slows the economy, reducing demand. That, in turn, breaks the spiral of higher wages leading to higher prices leading to higher wages, etc. But the current problem isn't classic wage-price inflation. Wages are going nowhere fast; something else is driving inflation. Take a look at the numbers for the quarter completed in September. The economy, as measured by gross domestic product, grew at a 3.8% rate in the quarter. Consumer prices, measured by the Consumer Price Index, climbed at an annual rate of 4.7%, the highest rate of increase since June 1991.Where did that inflation come from? Certainly not from wage increases. According to the Bureau of Labor Statistics, employers' wage costs grew just 2.3% in the last 12 months. That's the slowest growth rate on record, beating out the 2.4% annualized growth rate in wages reported in August. Instead, current inflation is almost all a result of higher energy prices. ".

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