In the midst of the buzz and optimism about the economic recovery in 2011, not many are talking about the fact that costs in America may also meaningfully rise, possibly at a faster rate than justified by underlying economic growth.
For example, many analysts are forecasting that oil will break above $100 per barrel this year when it previously cost as little as $67 per barrel last year. This means that consumers will have to shell out more cash for heating gas and gasoline, which will take away their spending power for other goods.
Then there is food inflation, which soared in the emerging markets countries but has also picked in the U.S., increasing 10 percent compared to last year, according to the latest American Farm Bureau survey.
Analysts are even more bullish on agricultural commodities than on energy commodities, so those prices may also increase substantially.
The rise in agricultural commodity prices will mostly impact consumers by reducing their purchasing power for non-food items. The rally in most other commodities like oil, because they have wide industrial uses, will also impact businesses.
Long-term interest rates, which is outside the control of monetary policy, has also risen recently. The 10-year yield has climbed from the low of 2.38 percent last year to about 3.33 percent. Although that's still lower than the prevailing rate in the first half of 2010, it could become a problem if it keeps going higher.
For consumers, higher interest rates means higher costs of long-term loans (like home mortgages). For businesses, it means increased costs for capital.
Rising costs, of course, is only a concern if it's not primarily a result of an improving economy, in which case increased demand naturally results in increased prices.
For 2011, one can certainly make the case that factors other than genuine private sector demand are pushing these costs up.
Three major candidates are loose (perhaps bad) monetary policy, the increase in the budget deficit, and stimulus leakage, which is related to the first two factors.
The Federal Reserve's program of quantitative easing received criticism from two important sources: the Chinese and Bill Gross, the world's largest bond fund manager. They allege that the U.S. government is engaged in debt monetization at the expense of debt holders, so it's quite possible they (and others) have turned against Treasuries for this reason. If true, long-term interest rates will rise to the detriment of the economy.
Furthermore, the ultra-low short-term interest rate set by the Federal Reserve may prompt investors to search for higher returns in commodities, which pushes up prices for the real economy.
President Obama's compromise with the Republicans on tax extensions will increase the budget deficit by hundreds of billions of dollars over the next two years. This, combined with Congress' perceived inability to tame government spending, could inflame U.S. debt concerns and also conspire to drive up interest rates.
Finally, the supportive monetary and fiscal policy may be fueling emerging market economies abroad instead of mostly benefiting the U.S. economy. This phenomenon would drive up the cost of commodities to the detriment of the U.S. economy, possibly cause future crises in those foreign countries, and possibly prompt their governments to pursue contractionary policies to cool their overheating economy.
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