Squeezed. Federal Reserve Chairman Benjamin Bernanke claims that it's okay if energy prices stay high because they won't fundamentally increase the costs of everything else:

"To the extent that households and business owners expect that the Fed will keep inflation low, firms have both less incentive and less ability to pass on increased energy costs in the form of higher prices, and likewise workers have less incentive to demand compensating increases in their nominal wages," he said.

And so he is expected to lead the Fed to raise the base interest rate yet again — for the 17th time — at the end of this month.
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Now, explain how raising the cost of money fails to increase the price of everything, and thus contribute to inflation rather than restrain it.
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If energy costs go up, then everything that relies upon energy (meaning everything) costs more to business. How long will a business choose to or be able to absorb that cost without passing it along? Answer: not very long, and in some businesses, not for so much as a month.
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Truckers have to raise their tariffs to cover gas-price increases, so everything delivered by truck — which is to say, just about everything — has to cost more. Business owners are not going to see their profits vanish. They're going to raise prices, no matter what Bernanke says.
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Likewise, if the cost of borrowing money goes up, everything that relies upon borrowing — which, again, is pretty much everything — costs more. Businesses will not absorb that increased cost either but will have to pass it along. So how does raising interest rates cut inflation? Answer: it cannot and does not. Quite the contrary, higher interest rates mean higher costs to borrowers means higher costs of doing business or paying your adjusted-rate mortgage or doing much of anything else. So prices go up because of interest-rate increases. Wages, however, cannot, because there is too much foreign competition.
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Energy costs are going up mainly, we are told, because China and India, and in lesser measure other "developing" economies, are using more energy as more people switch from bicycles or walking to mopeds and cars, creating greater demand. At the same time, Chinese and Indian workers (and, in much lesser measure, others in other poor countries) are driving down wages for workers in the First World, who are simultaneously being hit by the higher prices caused by growing energy demand in the very places to which our jobs are being sent, and the Federal Government is raising interest rates which will raise our mortgage payments and the prices manufacturers and other businesses charge us. Everything is conspiring to impoverish working people in the First World, but especially the United States, where there are fewer worker protections than in Europe.
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Something's got to give.
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(The current U.S. military death toll in Iraq, according to the website "Iraq Coalition Casualties" and major U.S. media, has reached 'another deadly milestone', 2,500.)
- posted by L. Craig Schoonmaker @ 2:41 PM