Soaring commodity prices, rising headline inflation and weakening economic growth: for those whose memories stretch back to the 1970s, this combination brings painful memories. It reminds them of the mistakes made by the central banks that accommodated the upsurge in inflationary expectations rather than contained them. Inflation was finally brought back under control in the early 1980s. But the costs of letting it escape were huge. Could we be making the same mistakes again?
In the US, headline consumer price inflation was 4.3 per cent in the year to January. In the eurozone, it was 3.1 per cent in the year to December 2007. In both cases, there was a gap – in the case of the US, a huge gap – between the headline rate and the “core” rate, which strips out volatile prices of energy and food.
If this were a temporary deviation, one would ignore it. But it has been continuing for years, particularly in the US (see chart). A cynical observer might well conclude that the Federal Reserve threw caution to the wind years ago. That is what Arthur Burns, then Fed chairman, did in the early 1970s, under pressure from Richard Nixon, then president. Has that been happening again in recent years? The question is surely a fair one.
Article source:- http://blogs.ft.com/economistsforum/2008/03/life-in-a-tough-world-of-high-commodity-prices/
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