Higher Gasoline, Food Prices Spark Inflation Worries

Higher Gasoline, Food Prices Spark Inflation Worries
January 24, 2011

The Consumer Price Index increased by one-half percent in December, while the Producer Price Index increased by 1.1 percent. This means the real purchasing power of your money has decreased.

The first page of a Google News search revels that “inflation” is a concern in Tunisia, Algeria, Jordan, China, India, Europe, New Zealand, and South Korea. Of course, inflation is a problem elsewhere, as subsequent Google pages shows.
 
Gasoline prices globally have risen more than 50 percent over the last two years. Food prices have also increased sharply. The United Nations price index for basic food is now at an all-time high. It has risen 23.5 percent over the last year and 4.4 percent in December alone.
 
We see the price of gasoline rise quickly in lockstep with world oil prices. Oil and gasoline prices are particularly erratic because oil is priced in dollars in world markets. As the value of the dollar gyrates, so do the prices of oil and gasoline. As the value of the dollar falls, the price you pay at the pump goes up.

Food Flexibility
Food prices are a different story because there are many ways to bake a cake. Processed food producers can change their recipes to use less of ingredients that have risen in price and more of those that have not increased as much.
 
When recipes cannot be changed, producers can reduce the size of their product. A 12-ounce candy bar becomes 10 ounces. The old 3-pound can of coffee now contains just over 2 pounds of coffee and the “can” is now plastic. Many consumers are oblivious to these changes.

Inflation’s Abnormality
However, there is something much more insidious going on behind the scenes with inflation. Higher prices are not a normal part of an economy. In fact, the norm should be falling prices, as we see with computers and TVs.
 
The abnormality is that more money is being added to the economy by the central bank. When the Federal Reserve came to the rescue in the economic crisis, it seemed like a magical moment for many. The Fed would buy a trillion dollars of toxic assets, “backstop” trillion-dollar markets, and buy up $600 billion of government bonds, among its dozen or so bailout programs.
              
Money Manipulation
The Fed has the power of the printing press, which means it can buy assets simply by changing a bank’s account using electronic entries. Money created out of thin air eventually works its way into the economy, and we have “too much money chasing too few goods.” The result is higher prices for you and me.

A higher “price at the pump,” however, is a deceitful way of paying the tab for the bailout of companies such as Goldman Sachs, AIG, Harley-Davidson, and Chrysler.

Mark Thornton (mthornton@prodigy.net) is an economist and senior fellow and resident faculty member at the Mises Institute in Auburn, Alabama.