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Inflation At 6-Month High

By: Steve Johnson

6/13/2008 - 12 Comments

The Labor Department reported Friday that consumer prices rose by 0.6 percent last month, the biggest one-month increase since last November. 

As I have been saying for a while now, inflation is going to be the biggest problem for the economy for years to come.  If inflation continues to rise by 0.6 percent each month, it could reach (0.6x12) = 7.2 percent within one year. That is if you believe the government numbers – while real inflation is more likely to be double what they are reporting. 

I read an interesting article today on the AllFinancialMatters.com blog, called “What’s the Solution to our energy needs?”

It talks about the high cost of oil and talks about drilling oil in the Arctic National Wildlife Refuge as a potential solution.  The comments debunk the idea based on the fact that there is not enough oil to reduce prices by very much and we are better off investing in alternative energy sources.  The best alternative energy source looks to be Algae as DJD says,

“Algae holds great promise - 1 acre produces 100,000 gallons of fuel, and it produces it rapidly, and it thrives on Co2 - perfect companion alongside coal plants, factories, airports, etc. It also produces more oxygen better than several acres of trees. The military is funding research as algae for jet fuel. Algae has a 4 tier system of use, with one batch being processed 4 times for different energy/agricultural purposes before it is processed back into the earth to create…more algae.”

Why are Prices Rising?

The real question that I think is being forgotten is; “Why are prices rising?”

It’s not just oil prices that are going up. Inflation is circling the world as many nations are already seeing double-digit inflation. The primary reason is because of an increase in the money supply. The definition of inflation is an increase in money supply.

Some would argue that the inflation is because of the growth of emerging markets, but that does not explain why we have not had inflation for the last decade of growth in the emerging markets.  Today, with the global slowdown, the emerging markets are growing slower than they did for several years – yet inflation is increasing.

The real culprit is the US Federal Reserve that has been printing and spending billions of dollars for decades. They have been able to get away with it as economic globalization has increased the need for the World Reserve Currency (the dollar). That increase in money supply has been soaked up by the last decade of globalization.

Globalization has run its course and the need for more dollars has peaked.  The dollar weakness is the primary reason behind higher prices and I'm not sure why very few people realize the importance of this. The dollar is the single most used currency in the world.  Its weakness is behind the global economy crisis.

The US Federal Reserve is only increasing the weakness of the dollar by lowering interest rates, because lower rates make it easier to borrow dollars, which leads to more dollars being borrowed and circulated throughout the world.  The more dollars the higher the prices are getting bid up.

The US is in a terrible position. The world is quickly realizing that we have lost control of the financial markets of the world and our economy super-power days are numbered. Just last week Russia (who has 12% inflation) blamed the US for the global financial crisis.

The ultimate doom for the US economy is if the entire world decides to stop supporting the dollar because of the inflation that it is causing. Some are already calling for the creation of a new international currency with a new global monetary system to replace the dollar.  For example, a few weeks ago, a China monetary policy insider, Nobel laureate Mundell, said the Chinese are looking for alternatives.

Dollar crisis looms, says Nobel laureate Mundell
“the global monetary system is headed for a dollar crisis within years”
“create what is a new international currency,”

The result of the US monetary policy is that we are exporting inflation by flooding the market with dollars.  The world is getting restless as inflation is eating into their food supplies and energy reserves.  The US monetary policy needs to change quickly, regardless if the US recession grows worse. 

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