Let's Be Truthful, Inflation Is Already Here
As I travel through the state of Illinois, business owners and families alike warn me that prices are on the rise. This trend leads me to believe that inflation has already accelerated inside the U.S. economy and lagging government measurements will take too long to give sufficient warning. Once higher inflation gains momentum, it will do great damage to the U.S. economy by stifling small businesses, challenging families and bringing difficulties for fixed-income seniors.
During testimony before the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke noted that rising commodity prices and uncertainty over oil supplies could change inflation expectations. It appears that his words of warning have been realized. As of April 1, many commodity prices have risen sharply since last year, including copper (18%), light crude (25%), soybeans (48%) and corn (85%). In my meetings with small business owners across Illinois, they report steep price increases that cut into profits. The danger is this strong upward price trend may take weeks, if not months, for government measures to record.
Just six weeks ago, the Federal Reserve predicted inflation between 1.25% and 1.75%. However, the Bureau of Labor Statistics reports that twelve month inflation rates rose from 1.7% in January to 2.2% in February to 2.7% in March, a nearly 60% increase over the last 90 days. The CPI-U, an index that measures inflation, showed an annualized inflation rate of 4.7% in its latest report. Additionally, MIT economists have predicted a worldwide inflation rate or approximately 5%. These numbers are all substantially higher than the range projected by the Federal Reserve.
There are many consequences to a climbing inflation rate. Recently, the Chairman and CEO of Berkshire Hathaway, Warren Buffett, stated "I would recommend against buying long-term fixed-dollar investments... if you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not." This is a stark warning from one of our country's most experienced and successful investors.
As the home of the world's reserve currency, the United States should experience lower inflation than markets overseas. Recently, both the Wall Street Journal and Washington Post editorial boards warned that with a weakening dollar, this may no longer be true.
Yesterday, the New York Times highlighted a Northwestern University study by Professors Arvind Krishnamurthy and Annette Vissing-Jorgenson which showed that under Quantitative Easing interest rates decreased, but only for companies with top credit ratings. They wrote "rates that are highly relevant for households and many corporations - mortgage rates and rates on lower-grade corporate bonds - were largely unaffected by the policy." Recently, the President of the Philadelphia Federal Reserve, Charles I. Plosser, echoed the conclusions of that study. Regarding Quantitative Easing, he said "I didn't think it was going to have much of an impact, and it complicated the exit strategy. And what we've seen has not changed my mind."
The rising price of energy, broad-based increases in the price of other commodities, as well as the negative S&P outlook for U.S. debt puts the country in a rapidly changing environment for expected inflation. I strongly urge Federal Reserve Chairman Bernanke to take extra care in measuring prices. If he agrees with the trends that I continue to see, he should prepare the Board for an early end to Quantitative Easing, along with other monetary measures in order to protect Americans from the lost purchasing power and economic turmoil that comes with rising inflation.
