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Life, Liberty and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,





Thursday, June 22, 2006

Can the Fed Really Control Inflation?

From Newsmax: As more and more factors contribute to a rise in inflation, many experts say that the Fed is essentially helpless to stop it - and that their primary weapon, interest-rate hikes, will do little stop it, especially in the short term.

So what is generating the higher inflation?

"Some economists say rising energy prices are bleeding through to affect the broader economy," according to CNNMoney.

"Others point to the rise in housing prices during the recent real estate boom. Some even say that due to a quirk in how the government measures housing prices, a weaker real estate market can actually make inflation seem higher."

The article cites energy, housing, a weaker dollar and wages as primary inflation generators.

At the last Fed meeting, the group stated that rises in prices of energy and various commodities had not seriously affected core inflation - but many experts claim that is a simple way of looking at the situation."Even indirectly, energy has an impact (on core inflation), especially when it goes up this much," David Wyss, chief economist with Standard & Poor's, tells CNN. "And there's a lag there. We still haven't fully adjusted to $70 oil."

In terms of housing, while home prices and mortgage rates have risen from a year ago, these data are not even included in calculating the official Consumer Price Index or other inflationary barometers."Instead, government statisticians measure housing costs using something called owners' equivalent rent,' which estimates how much it would cost home owners to rent their own homes," reports CNN, which says that figure has risen 3.3% in the last year, marking one of the largest jumps in a CPI component - discounting the fact that the real estate market has cooled.

Another real influence on inflation is a falling dollar, which is down 6% so far in 2006 relative to other global currencies.Meanwhile, Paul Krugman - a columnist for The New York Times and professor of economics and international affairs at Princeton University who also served on the White House Council of Economic Advisers - says he is worried about inflation also.

But he says he less concerned with price increases and more worried about the Fed's response to those rises. And he is especially concentrating on wages.

"Fed officials now seem worried that we may be seeing the start of another round of self-sustaining inflation. But is that a realistic fear? Only if you think we can have a wage-price spiral without, you know, the wages part," says Krugman in his column.

"The point is that wage increases can be a major driver of inflation only if workers consistently receive raises that substantially exceed productivity growth. And that just hasn't been happening."

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