One of the classic blunders of monetary policy is detailed below in Bloomberg's story.
The monetary authorities always wait too long before tightening because they don't understand inflation is a monetary phenomenon, not an effect of economic growth.
The article below clearly links inflation to growth, implying that excess capacity in the economy will restrain price increases. This is wrong today, and always has been.
By the time inflationary pressures surface, it will be too late to control future price increases by Fed action, and attempts to do so by reducing the monetary base will only increase long-term interest rates.
Further, attempts to constrain bank lending with quarter point increases in Fed Funds will have no effect on bank lending till short rates exceed long rates and the economy drops into a recession.
Prices always increase faster than the Fed can raise rates.
Sometime later this year, prices will begin to rise, and they won't understand why.
Watch for declining long bond prices, declining value of the dollar, and increases in gold and the CRB.
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Producer Prices in U.S. Rose 0.2%; Ex-Oil Unchanged (Update1)
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By Courtney Schlisserman
Jan. 20 (Bloomberg) -- Wholesale prices in the U.S. rose at a slower pace in December, showing the economy is recovering without the immediate threat of inflation.
The 0.2 percent increase in prices paid to factories, farmers and other producers followed a 1.8 percent jump in November, according to Labor Department data released today in Washington. The gain was more than anticipated and reflected higher food costs. Excluding food and fuel, so-called core prices were unchanged.
An unemployment rate projected to average 10 percent this year and excess capacity are giving companies room to hold the line on prices. Few signs of inflation will allow the Federal Reserve to keep interest rates near zero in coming months to help fuel the economic recovery.
"We're not looking at any sort of major inflation pressures emanating from the manufacturing sector," said Jonathan Basile, an economist at Credit Suisse in New York. The Fed's view on inflation is that it's "contained, subdued and that's what the PPI is telling us," he said.
http://www.bloomberg.com/apps/news?pid=20601068&sid=apq2nmpaKA.o
