Threat of inflation

[room305]

so oil is rising due to too much money?? could it not be demand and speculation that is driving commodity prices higher or is it purely due to global liquidity situation?

It is certainly a factor, globally people and companies shrugged and absorbed the rises with a little grumbling. There was no real change in the demand side of the equation. Compare this reaction to the oil crisis in the 1970s. As money is sucked out of the economy by interest rate rises, fewer people will be able to absorb the high energy costs and will look to reduce their demand for the goods.

That said, I agree with your comment, it is not fair to say inflation is purely a monetary phenomenon and can be dealt with solely by monetary policy. Central bank chiefs are now expected to act like politicians as much as economists.

 

[PMU]

If you are interested in inflation as a monetary phenomenon you should check out the Wikipedia entry that gives as good explanation as I could. http://en.wikipedia.org/wiki/Inflation http://en.wikipedia.org/wiki/Monetarism

To get back to evoke’s original question:

i do not understand if the fed raises interest rates why does it have a effect on the whole world. i know when america does bad, europe does bad .but the whole world. they must have a huge grasp on the world. why is that. /quote]
One reason the Fed’s decisions on monetary policy affect the whole world is simply that about 45% of the world’s total investible assets are denominated in US dollars (i.e. US dollar denominated bonds (19%), US equities (21%) and US real estate (5%)). Changing interest rates changes the relative returns between bonds, equities and real estate thus altering prices, which are set by the market. This also affects prices elsewhere in the world as Americans or anybody else won’t hold equities unless the market rewards them for the extra risk in doing so. So changing interest rates affects the yield on bonds that then affects decision making on equity investment, and interest rate changes affect decision making in real estate investment by changing the price of mortgages.

 

[Canonball]

Perhaps our learned economists and wannabees out there can explain the significance of the latest weak export figures (see attached CSO release today), taken together with the recent (and probably forthcoming) increases in inflation. The figures show that the period 1996-2001 showed huge growth in exports (value terms), whereas the export performance for the period 2001-2006 has been very very weak (with 2006 looking like being another disappointing year judging by the Jan-Apr figures). How resilient can the exporting sector be now that inflation is taking off again (on top of an already high cost base)? If our export performance for the next 5 years is as bad as the last 5 years can we still stay pretty?

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[bearishbull]

Perhaps our learned economists and wannabees out there can explain the significance of the latest weak export figures (see attached CSO release today), taken together with the recent (and probably forthcoming) increases in inflation. The figures show that the period 1996-2001 showed huge growth in exports (value terms), whereas the export performance for the period 2001-2006 has been very very weak (with 2006 looking like being another disappointing year judging by the Jan-Apr figures). How resilient can the exporting sector be now that inflation is taking off again (on top of an already high cost base)? If our export performance for the next 5 years is as bad as the last 5 years can we still stay pretty?

[broken link removed]

As george lee pointed out in "BOOM" the last 5 years have been driven by an unsustainable property boom rather than the thing that makes countries rich -an export boom(like we had pre2001).the sucess of the economy in last 5 years is built on unsustainable growth in house prices ,building, unproductive (non export) jobs,consumer spending,and immigrant workers.
The succesful appearance of this economy is a facade that hides the ugly true state of affairs.
As moor mcdowell said ,we cant get rich/stay rich taking in each other washing!

 

[gearoidmm]

Inflation is already here. In America, the core inflation rate is >3%. If you include energy and food prices (which of course you should, they affect everybody), the inflation rate is >5%. Producer prices, import prices, everything is rising rapidly at the moment, just as the economy is starting to slow down.

In parallel, we are seeing a rapid rise in inflation here also which will only get worse as interest rates rise, increasing mortgage repayments. The genie is out of the bottle.