America: The inflation nation
The low interest rate is already causing a spike in commodities, but it won’t last
When informed he’s going to be answering questions about the Fed’s decision to cut its interest rate again, Bert Ely snores. You can literally hear him on the other end of the telephone, throwing back his head and emitting a long, rude sound indicative of boredom. Then he chuckles. “Sorry, you’ve got to understand, I’ve got CNBC on all day. I don’t know how they would fill the air time if they didn’t have this to talk about.”
Ely, a banking consultant in Alexandria, Va., and president of Ely & Company, simply thinks that last Wednesday’s quarter-point cut is not that big a deal. But why doesn’t everyone else agree with him?
To start, this is the Fed’s seventh cut since September and brings the federal interest rate down to 2 percent, the lowest it’s been since 2004. Though the Fed has hinted this will be the last cut for a while, the fear is that the low interest rate is already increasing inflation and causing a spike in the cost of commodities (i.e., gas at $4 a gallon, butter and rice turning into indulgences), even while it inspires economic growth in the form of investments.
“Money managers and citizens sensitive to inflation are concerned, but that’s the tradeoff the Fed is making,” says Mark Reich, principal of E. Mark Reich CPA. “They’re willing to give up the inflation because they’re scared about a systemic lack of confidence in the economy.”
But Ely doesn’t see a direct link between the Fed cut and inflation — to make such a broad statement ignores the role ethanol is playing in food prices, not to mention fluctuations in exchange rates, possible interference by speculators and so on. He’s got his eye on speculation, actually, and his tone shifts to the ponderous as he reveals this gem: “I am struck by the fact that there appears to be a lot of speculative demand out there for commodities. Like rice; why is rice suddenly in short supply when production is increasing by 1 percent a year? I wouldn’t be surprised if there is some hoarding going on.”
Regardless, both Reich and Ely agree that inflated prices won’t last forever. “The European bank hasn’t decreased their interest rates yet because they’re worried about inflation, but they will,” says Reich. “And then the dollar will firm up. I don’t think the dollar is irrevocably weakening.” Ely’s sentiments echo this. “Every bubble breaks,” he says. “A backlash is developing. And it’s a global backlash.”