Angela did a good job on summarizing The Economist’s inflation article “Bobbing Back Up?” I’m just a little confused as to why the price of a barrel of oil has fallen from a high of $80 to just under $50 during the middle of January, and yet, the inflationary measures (as reported in the consumer price inflation) rose from 1.7% to 2.1%. I guess I don’t see the correlation as to why this article parallels the price for a barrel of oil decreasing with the unexpected increase in producer prices. I also was a little confused with the term “volatile, ‘non-representative’ figures” as a measurement that is left out from price indexes. These two points of confusion may be the answer as to why the inflation figures rose a full percentage point higher than the 2% target rate for the Bank of London, which prompted the Bank of London to unexpectedly raise interest rates to match inflationary expectations.
Even with my few questions pertaining to the introduction to this article, Angela’s summary is dead-on with the reasons behind the relatively low inflation experienced throughout much of the world over the past decade. To keep the yuan artificially weak against the U.S. dollar, China has large holdings of U.S. securities in order to sell goods to the United States and Europe at a cheaper rate. However, both England and the United States, especially the U.S. according to this article, want China to float its own exchange rate to make China’s exports more expensive. This protectionist ideology is in place simply to cool off the “overheating economy” with high inflationary pressures. In addition to examining the economy of China, this article looks at how Japan wants to strengthen the yen by getting people to borrow in the Japanese economy with low interest rates and invest in higher-yielding assets in other countries where the rates are much higher.
This article briefly mentions the connection between a large labor pool and relatively low inflation due to the abilities for companies to outsource and provide a cheaper product, which ultimately leaves the consumer with more disposable income. This may be totally incorrect or too much of a stretch, but my question here is whether an increase in disposable personal income (which means that consumers have more money to invest) would lead to an increase in the money supply and the eventual increase in the aggregate prices or just serve as a multiplier effect as the money trickles through the economy?
