The Fed's relentless policy of interest rate cuts is working like a charm. The dollar hit a record low against the Euro ($1.5057) and oil hit a record $102 in response -- up 325% since January 2001's $24. The record oil price has not yet found its way to the gasoline pumps -- but it will. If oil prices remain above $100, by this summer gasoline prices will top $4 a gallon -- or $80 for a 20-gallon tank. Back in January 2001, you would have paid about $1.59 a gallon -- so you've got a 152% price increase there.
What is going on here? According to the New York Times, producer inflation is up 7.4% -- the worst since 1981. The U.S. has pursued a weak dollar policy -- relative to the Euro, the dollar has lost 63.7% of its value since January 2001 when it traded at 92 cents to the Euro. And since oil is denominated in dollars, a weaker dollar translates into a higher oil price. That excludes the effects of political instability in oil producing regions -- Iraq and environs -- and rising oil demand in China and India.
How are you coping with this? The Times reports that one person, Phyllis Berry, a 31-year-old factory worker who drives a beat-up Dodge Caravan, said, "I used to fill it up pretty regularly, but now I drive it until the tank is almost empty, looking for the cheapest place to buy gas." She said that she used to take her four children to the movies four or five times a month. But with the cost of gas, tickets, popcorn and soda adding up to $70, they now go only once a month.
When the Fed's Chair Ben Bernanke testifies today, he'll likely dismiss inflation as a lesser concern than the credit crunch. Is he making the right choice? I don't think so. How about you?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
3-03-2008 @ 8:34PM
rob sssss said...
Its a terrible move ! Bernanke's obviously protecting his stock investments; he has a knee jerk reaction to Wall Street and believes that the greatest measure of the economy is the Dow. This simplistic and flawed view is causing and will cause more damage to lower and middle class Americans, as the continuously plummeting dollar promises higher fuel costs and substantial inflation for just about everything that is created or shipped. Then, the lower and middle class will not have as much money to spend - they will buy less and our economy will tank (consumer spending is still 2/3's of our economy). Let the market fall naturally, if it must. Build the power of, and confidence in, the dollar, so prices, particularly oil/energy, fall. Our last recession was preceded by high oil/gas/energy prices, it was a drain on the economy - why can't he see that ? Until we kick the foreign oil habit (now I'm dreaming), we need to do whatever we can to improve our purchase power. Continually decreasing the interest rates is clearly not accomplishing that - in fact, it is doing the opposite.
3-03-2008 @ 10:52PM
Eric rrrr said...
It is true that as the dollar drops everything we import gets more expensive, a falling dollar in a global economy is inflationary. But it is also true that the value added by us, our products, become cheaper abroad. I do not believe that the statement "the jobs will never return" is accurate.
Energy is tied into everything, our investment in available local energy sources (wind, geothermal, solar, nuclear, coal, etc (I would include biofuels but frankly I don't much like competing for food with our energy hungry machines)) and investing in energy saving measures (driving less and more efficient vehicles, car pooling, using more public transport, reducing the energy usage in our homes, moving more goods and people more efficiently by rail) would significantly improve our international competiveness. By letting the dollar fall and consequently the price of energy rise, provides the motivatation and climate to invest in energy savings. This isn't just about wall street, nor the credit crunch. This is also about motivating people to preserve spaceship earth. There is a silver lining in the clouds of a falling dollar.