Another take on QE2 and commodity prices

Thin posting these days because I've been way too busy with travel and other things, and really don't have time for blogging.  At some point I hope to write something about a great meeting on PES (that's Payments for Ecosystem Services) in Chapel Hill last week and a trip to Illinois where I gave a seminar and had some great discussions Scott Irwin.

For now, here's a brief follow up to a post a couple weeks ago where I critiqued Jim Hamilton's post on the effect of negative real interest rates on commodity prices.  That argument didn't convince me. But in a more recent post he now says that decline in value of the dollar seems to be driving broad increases in the prices of commodities.  On this point I agree.  A weaker dollar is likely driving up commodity prices, and the decline in the dollar probably has something to do with QE2.

But I guess I don't see this as especially ominous.  Commodity prices are a very small share of retail prices in this country and all other developed nations.  Only oil prices have an appreciable influence on anything, and even that is far less than it once was.  It will take a heck-of-a-lot more dollar weakness for commodity price increases to show up in retail price increases---ie., actual inflation.  Moreover, if other countries--particularly European--were were to engage in their own QE programs, I don't think we'd even see commodity price increases.

A brief side note: One of Jim Hamilton's most famous lines of research (which actually inspired my own dissertation work) is about the link between oil prices and the macroeconomy.  I think it's important to note that not all oil price shocks are alike (or, more generally, commodity price shocks in general).  The price shocks prevalent in Jim's work, and through much of history, have to do with supply shocks or anticipated supply shocks (eg., speculative storage in light of unrest in the middle east).  But the spike in 2008, and currency-related effects we're seeing now, and shocks we're most likely to see in the future, are demand shocks, not supply shocks.  And this difference, I think, has very different implications for the macroeconomy.

I'm just an armchair macro guy.  But right now I'm with the Krugman-Delong front[1, 2, 3, 4].  I just don't see how inflation could possibly be a major concern given most of what we consume is (a) rent or (b) mostly comprised of wages to labor.  Neither rent nor wages are going up unless the economy recovers fast.  No one thinks that's happening. And even in the off chance the economy were to suddenly return to full employment and thus give rise to real inflation fears, the Fed would reverse QE2 in a nanosecond, thereby deflating those inflationary fears.

I understand some people are genuinely fearful of inflation.  But on an intellectual level, I just don't understand why


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