After reading his most recent Congressional testimony you might think that Ben Bernanke was not the same Fed official who steered us into and then (partly) out of the most recent crisis. The reason I say that is because his commentary regarding commodities appears totally oblivious to the problems that surging commodity prices can cause (let us not forget the turmoil that $150 oil caused). He states:
“Although overall inflation is low, since summer we have seen significant increases in some highly visible prices, including those of gasoline and other commodities. Notably, in the past few weeks, concerns about unrest in the Middle East and North Africa and the possible effects on global oil supplies have led oil and gasoline prices to rise further. More broadly, the increases in commodity prices in recent months have largely reflected rising global demand for raw materials, particularly in some fast-growing emerging market economies, coupled with constraints on global supply in some cases. Commodity prices have risen significantly in terms of all major currencies, suggesting that changes in the foreign exchange value of the dollar are unlikely to have been an important driver of the increases seen in recent months.
The rate of pass-through from commodity price increases to broad indexes of U.S. consumer prices has been quite low in recent decades, partly reflecting the relatively small weight of materials inputs in total production costs as well as the stability of longer-term inflation expectations. Currently, the cost pressures from higher commodity prices are also being offset by the stability in unit labor costs. Thus, the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation–an outlook consistent with the projections of both FOMC participants and most private forecasters. That said, sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored. We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability.”
There are a few key points in there. First, he notes that any additional money that is supposedly entering the system via QE is not the culprit for rising prices. This is partly true. While there is no transmission mechanism via additional dollars or foreign exchange movements there is a speculative nature surrounding QE. After all, he conveniently takes credit for rising equity prices in an earlier paragraph, however, he seems to believe that all market speculation ends there and that investors aren’t so fearful of his “money printing” that they are running into the hands of hard assets. This is dishonest at best.
But more importantly, we must recognize that these price increases in commodities are simply not organic. There is nothing normal about cotton prices rising 200% in 6 months. I am sorry, but these sorts of moves cannot be entirely attributed to stronger global demand. There are clearly other forces at work here. And while it might not be incorrect to say US monetary policy is not directly impacting these prices through monetary or currency channels I think it is highly misleading to take credit for the speculative nature of the equity price increase while also ignoring the speculative ramp in commodity prices.
From a business perspective it is clear that Mr. Bernanke has no idea what rising prices mean for a business as we hear more and more concern about reduced margins. In addition, I am surprised by his quickness to dismiss the dangers of rising prices and their impact on inflation. Yes, we agree that they will not result in sustained inflation and certainly not hyperinflation, but these price increases significantly increase the odds that the US economy could sink back into recession. And as I’ve said before, this would likely result in reinforced deflationary fears – the very thing Mr. Bernanke is attempting to defeat.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.