Stagflation

Recent increases in food, energy and now steel prices have raised concerns about a burst of inflation around the world, including the US. Is this evidence that the Fed has gone too far in its efforts to generate a recovery by increasing bank reserves? In my judgment the answer is definitely, no. What's happening with input prices is clearly a relative price phenomenon: flooding in Australia and crop failures elsewhere have made food scarce (and, interestingly, the flooding has also hit the steel market), and the boom in China and other emerging economies has increased demand for energy. This requires an increase in prices of those products (and goods and services that use them intensively as inputs) relative to other products. The easiest way to accomplish this is for the Fed to allow a one-time jump in the US price level, which means several months or a couple of years of somewhat higher inflation than usual. A monetary contraction would not solve anything. The increase in food, energy and steel prices is a result of events in the economy outside the US, so slower growth in the US would have very little effect. A major contraction in the US might put downward pressure on inflation (presumably if the US economy shut down entirely that would diminish demand for food and oil), but the costs of another recession would seem to me to be far too great to pay.

There may be some regulatory changes that could provide temporary relief. First thing I would do would be to suspend or repeal requirements that gasoline require a certain amount of ethanol and eliminating ethanol subsidies. Ethanol seems to be a dead end anyway, and this would free up corn supplies for use as food.