Sunday, June 15, 2008

Deja Vu

Do you remember gas lines? Inflation? I do, and it's all coming back, wait and see. Funny the "rice shortage" scare was averted so quickly, what will be next? Are we sheep to be herded from one made up fear to another?

From McClatchy..., on how it's like the 70's all over again...inflation rears its ugly head.

Fed policymakers in April projected a dismal growth rate for 2008 of between 0.3 percent and 1.2 percent. That forecast implies that the slowing economy will dampen inflation's embers before they ignite into fire.

That suggests "no tightening (of interest rates) until the end of the year," said Reinhart, now a senior fellow at the American Enterprise Institute, a conservative policy group.

But what happens if a hurricane rips through the oil-rich Gulf of Mexico later this summer? Researchers for investment bank Goldman Sachs & Co. predict that'd send oil to $200 a barrel. And $200 oil would send all kinds of prices skyward, creating the potential for 1970s style inflation.

"That really gives the Fed very big headaches, because $200 oil is going to set back the economy big time and the U.S. big time," said Gramley, the Reagan-era Fed governor. "There just aren't any easy options in this case."

SIDEBAR BOX (165 words 5")

Factors affecting inflation -- the rise in prices across the economy.

Rising oil price: Makes virtually everything that we eat or make more expensive. Oil prices affect the costs of plastic, packaging, chemicals, fertilizers, transportation and sundry other products.

Weak dollar: Makes imports more expensive, adding to inflation. The weak dollar is also partly to blame for high oil prices since foreign producers demand more dollars for the same barrel of oil to make up for the dollar's diminished value.

Economic slowdown: Bad for consumers and business, good for inflation. Slow growth moderates inflation, which ticks up as the economy heats up.

Imports: For the last 15 years, low-priced imports have kept inflation low. Shoes, clothing and electronics made in Asia cost Americans jobs, but also lower costs of products we buy. China is now facing its own inflation problem, with an official rate near 8 percent, which translates into higher-priced imports for American consumers and adds to inflation pressures here.

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