Globalization & Inflation

As noted yesterday, Traders were none too happy with BB’s testimony, setting them straight on the errors of their ways last week. 

The always astute Bill King points out that this should not have been a surprise. Bill notes that a speech the Chairman made earlier in the month at Stanford, Bernanke explicitely noted concerns about Globalization and his inflation worries:

"On the other hand, not all aspects of globalization and trade reduce inflation. For example, globalization has been associated with strong growth in some large emerging-market economies, notably China and India, and this growth likely has contributed to recent increases in the prices of energy and other commodities. During 2003-05, for example, China alone accounted for nearly one-third of the growth in both global real gross domestic product (GDP) and oil consumption.

It is difficult to assess the exact extent to which increased demand by developing countries has contributed to the run-ups in commodity prices in recent years, as these prices are also affected by supply conditions and other factors. However, one study estimated that, if the share of world trade and world GDP enjoyed by non-industrial countries had remained at its 2000 levels, then by 2005 real oil prices would have been as much as 40 percent lower, and real metals prices 10 percent lower, than they actually were (Pain, Koske, and Sollie, 2006).

Accordingly, in the past several years, the effect of growth in developing economies on commodity prices has been a source of upward pressure on inflation in the United States and other industrial economies.

When the offsetting effects of globalization on the prices of manufactured imports and on energy and commodity prices are considered together, there seems to be little basis for concluding that globalization overall has significantly reduced inflation in the United States in recent years; indeed, the opposite may be true.   (emphasis added)

Chairman Ben S. Bernanke, March 2, 2007

Now, I am cherry picking a few paragraphs out of a 4324 word speech. And the Fed Chairman, like all economists, is two-handed.

However, a careful read of his full speech, along with some intelligent context, makes it clear that the Fed remains quite concerned about Inflation on the one hand, and slowing economy on the other. Pick a hand, and draw your own conclusions.


Globalization and Monetary Policy
Remarks by Chairman Ben S. Bernanke
At the Fourth Economic Summit, Stanford Institute for Economic Policy Research, Stanford, California
March 2, 2007

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