Inflation: believe your pocketbook, not the Fed

The working class is being hit with two economic punches. One is the housing crisis and foreclosures tied to failing subprime loans. The other is rising inflation.

The Federal Reserve Bank—the Fed—is often presented as the economic “superman” that always shows up to save everyone from economic disaster. In reality, the Fed is the bankers’ bank and is concerned only with the interests of the bankers.

As the central bank, it controls the money supply. The big commercial banks get loans from the Fed’s central bank at a rate much lower than any regular person could ever get. In the subprime crisis, the Fed is now trying to bail out the banks and Wall Street by lowering the interest rates it charges on the loans it gives to the big banks that are in trouble.

Lowering interest and making money easily available to the big banks can definitely be inflationary.

In the second week of December, the Labor Department reported the most serious rise in inflation in decades with a 14.1 percent rise in energy costs, a whopping 34.8 percent jump in food costs, and the biggest monthly increase in wholesale prices since 1973.  

In response, the Fed suggested that inflation isn’t really bad. To do this, the Fed cited the Core Inflation Rate, which disregards the dramatic food price hikes and the steadily rising transportation and energy costs, closely tied to the volatile rise in oil prices.

Relying on this falsely low figure, the central bankers said, “Readings on core inflation have improved modestly this year” and that this type of inflation is “mild” and not a grave concern.

For workers, any kind of inflation can be very serious because it cuts into the value of their wages, their savings and their pensions. Inflation can rightly be called a pay cut for workers.

But how can any economic index be justified that ignores food, energy and heat? Everyone must eat, get to work and warm their homes.

Inflation shows no signs of slowing down. According to the Bureau of Labor Statistics, “The Consumer Price Index for Urban Wage Earners and Clerical Workers increased 0.8 percent in November,” which is just shy of 10 percent on an annual basis.

Besides the flood of money that the Fed is pumping into the U.S. economy—that is, more dollars chasing the same amount of goods, the classical definition of inflation—there are two other inflationary pressures at work.

Prices are rising in China, because even though millions of workers are joining the urban working class, labor is still in short supply in its booming economy and wages are increasing. Since the U.S. imports huge amounts from China, this spike in prices is going to have a major impact on inflation in the U.S.

The falling dollar has probably reached a tipping point. Foreign countries now want a premium to take dollars for their goods, whereas in the past, the dollar was propped up by its use as a reserve currency. This year the dollar has fallen more than 10 percent against a basket of foreign currencies. The economists are still arguing, not about whether the fall of the dollar will affect the rise of prices, but about how much.

So when you go to the store and you have to spend more to bring back less, believe your pocketbook, not what the papers and the media say.