http://money.cnn.com/2008/06/25/news/newsmakers/buffett_bernanke.fortune/index.htm?cnn=yes
Buffett vs. Bernanke: The inflation showdown
The billionaire investor says inflation is 'exploding,' but the Fed
believes commodity price shocks should subside.
By Colin Barr, senior writer
June 26, 2008: 8:08 AM EDT
NEW YORK (Fortune) -- Even Warren Buffett is wrong some of the time.
Federal Reserve chairman Ben Bernanke is hoping this is one of them.
Buffett, the billionaire investor behind Berk****re Hathaway (BRKA,
Fortune 500), fingered "exploding" inflation Wednesday as the biggest
risk to the economy. "I think inflation is really picking up," Buffett
said on CNBC. "It's huge right now, whether it's steel or oil," he
continued. "We see it everywhere."
Indeed, the prices of gasoline and milk have shot past $4 a gallon,
and Dow Chemical (DOW, Fortune 500) has announced twice in the past
month that it's raising prices to offset soaring commodity costs.
Yet Bernanke's Fed signaled Wednesday that, after nine months of
interest rate cuts and expansive lending to the financial sector, it
isn't eager to reverse course and push rates higher to try to tamp
down rising prices.
Why? Because the Fed remains skeptical that high commodity prices will
ripple through the economy, leading to broad price hikes and big wage
increases.
"The committee expects inflation to moderate later this year and next
year," the Federal Open Market Committee said in holding the fed funds
rate steady at 2%, though it did note that "uncertainty" remains high
and suggested inflation concerns could rise.
Depends on what you mean by 'inflation'
In part, the Fed's decision turns on a distinction economists make
between inflation and "relative-price changes." The former is a
general loss of purchasing power that's caused, or at least
exacerbated by, overly lax monetary policy (such as keeping interest
rates too low for too long). The latter are price hikes driven
primarily by fundamental ****fts in supply and demand.
If demand for commodities is spiking because of strong worldwide
growth, the thinking goes, prices should rise accordingly, until
consumers react by reducing consumption - a process that isn't apt to
be influenced by interest rate changes.
The Fed is betting that rising prices won't feed through to higher
general inflation expectations unless workers start demanding raises
and companies start raising prices.
But wages haven't been rising sharply, and declining unionization
means workers have less bargaining power than they did during the
inflationary 1970s, economists say. And while some processors of
commodities, like Dow, are charging more, their customers in turn have
generally been unable to pass along those costs to consumers.
So even as some members of the Fed's policymaking body, such as Dallas
Fed President Richard Fisher, warn of the need to take quick action
against inflation - Fisher dissented for the third straight meeting in
Wednesday's vote, this time advocating a rate increase - committee
members' inflation forecast for 2010 has risen only slightly since
October, despite surging oil prices.
"Oil prices have ratcheted up over the past nine years and the dollar
has depreciated for more than six years. Nevertheless, as long as a
central bank is not creating an excessive amount of money, these
relative price pressures ought to be transitory," Sandra Pianalto,
president of the Federal Reserve Bank of Cleveland and a voting member
this year of the Federal Open Market Committee, explained in a speech
last month.
"As consumers spend more money for higher-priced petroleum and
agricultural goods," she continued, "they eventually have less money
to spend on other goods and services. Other relative prices must then
fall."
Wait and see
To be sure, there are other factors at work in the Fed's move to the
sidelines. Bernanke & Co. wants to measure the stimulative effect of
the rate cuts it's already made. The rate cuts of the past nine months
- the Fed has slashed its overnight bank lending rate by 3.25
percentage points since September - will take time to impact the
economy. If possible, the Fed wants to wait before making another move
on rates.
And while fears of a marketwide meltdown seem to have eased, a weak
housing market, rising unemployment and increasing loan losses at
banks mean the risk of a sharp economic pullback remains substantial.
"In an environment of dislocated funding markets, a rate cut would not
produce a recovery but a rate hike could trigger a recession," writes
Tullett Prebon economist Lena Komileva.
Indeed, while inflation is the buzzword right now, the surge in fuel
costs is hurting growth in some key industries. Airlines such as
United Airlines, a unit of UAL (UAUA, Fortune 500), and Continental
(CAL, Fortune 500) have set plans to eliminate thousands of jobs in
response to soaring fuel costs.
Automakers Ford (F, Fortune 500) and General Motors (GM, Fortune 500)
have slashed their production schedules as well, as consumers stopped
buying the fuel-guzzling s****t utility vehicles that were once a huge
source of profits for Detroit. The loss of high-paying pilot and
autoworker jobs will only add to existing weak wage and job trends.
None of this makes the recent price shocks easier to bear, of course.
But for policymakers, if not for media darlings such as Buffett, the
distinction is an im****tant one. "While sometimes devastating,"
Pianalto said in her speech last month in Paris, "these global
relative-price pressures are not the same thing as inflation."
"I want justice...There's an old poster out West, as I recall, that
said, 'Wanted: Dead or Alive,'"
- G.W. Bush, 9/17/01, UPI
"I don't know where bin Laden is. I have no idea and really don't care.
It's not that im****tant. It's not our priority."
- G.W. Bush, 3/13/02
Pay your taxes so the rich don't have to.
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