Inflation About to Become a Massive Headache for Central Bankers
With the recent new monetary policy initiative by the Federal Reserve, one area that I’m becoming more worried about is the impact this will have on inflation. While inflation has declined from the highs in the 1970s, there is always the worry that monetary policy could ignite the flame of higher prices in the future.
The problem with inflation is that once it becomes imbedded within a society, it is extremely difficult to eradicate. While commodity inflation is troublesome, it’s not the biggest worry, as those prices can quickly adjust. It’s not difficult for the price of wheat to decline if there is a large crop, for example.
The problem with monetary policy actions that are too easy for too long is that inflation starts to creep into wages. Once you have wage inflation, it is extremely difficult to remove from the system. While the price of wheat can decline 10% quite easily, wages cannot move in such a manner.
So far, wages have not moved at all. This is due to the slack in the economy. The slack denotes the difference between current and potential gross domestic product (GDP) growth rates. Monetary policy action is used to help decrease this gap, to adjust it to prevent inflation from occurring. The problem is that this is not an easy task. Read More http://www.investmentcontrarians.com/inflation/inflation-about-to-become-a-massive-headache-for-central-bankers/811/