How Much Should Commodity Price Inflation Scare Us?

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If you drive a car, then you have probably noticed that gasoline prices have been ticking up. That's because oil prices have been rising recently. The prices for some type of food are also headed upward. Does this mean that Americans will soon see their purchasing power diminished as broader inflation enters the picture? It depends. Although energy and some food prices may put stress on descretionary spending, it's unclear if commodity price inflation will raise the prices of other goods and services as well. Michael S. Derby examines this question at Real Time Economics today:

Rising food, energy and raw material costs are problematic on several fronts. They can feed into core inflation and drive up underlying price trends. Commodity-based gains can also create drag on growth, because for many companies and firms, the cost of things like energy is unavoidable. Money spent there is money that can't be spent on other things, so the higher the cost of something like oil gets -- futures prices for Brent crude oil cracked $100 a barrel Monday -- the less spending power remains available for things like car purchases or home electronics, and so on.

The Federal Reserve isn't worried. First of all, it used its desire for higher inflation as an explicit reason for its recent quantitative easing initiative. Second, it cares more about core inflation -- which excludes food and energy -- than total inflation. So don't expect the commodities price increases we've noticed to cause the Fed to blink unless core inflation begins to grow more aggressively than central bankers anticipated.

Read the full story at Real Time Economics.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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