nflation: not dead
“The big story in the markets this week is the continuing decline in commodity prices,” says Daniel Gross in Slate, especially oil. This has led many to hope that dropping raw-material and energy prices will lead to lower inflation, and head off an interest rate hike by the Federal Reserve. If only! The problem with this scenario is that in recent years, “and especially in the past year—businesses have acted as shock absorbers,” unwilling or unable to pass on cost increases. Now, facing the need to pad margins to recoup earlier losses, businesses have to raise prices or cut the quality or quantity of their product. “When you pay the same for smaller portions or for goods of lower quality, that’s inflation.”
The central bank’s dependency problem
The U.S. Federal Reserve, the European Central Bank, and the Bank of England “have morphed from being lenders of last resort,” says Mark Gilbert in Bloomberg, “to becoming the first port of call for institutions in need of cash.” And as banks grow “addicted to central-bank funding,” they aren’t even passing that cash on to businesses and home buyers—they’re hoarding it. This isn’t good for the markets, and it creates a “tricky task” for the central banks: “unhooking the banking world from the life-support machine of easy money without killing the patient.” Right now, the central banks are trying “methadone”—small regulatory tweaks—when what they need is to cut off the banks “cold turkey.”
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