News: Federal Reserve Expects Gas and Food Prices to Drop Soon

June 26, 2008 | Written by: Connie Brooks

Donald Kohn, the Federal Reserve Vice Chairman gave a speech today (6/26/08) at the International Research Forum on Monetary Policy in Germany. In his speech he proposed the idea that fuel and food prices would soon be dropping.

To this, Mr. Vice Chairman, we respectfully say: Bull. Or, perhaps, Bear, because that is what we are going to continue to see for quite a while.

Here’s a quote:

“In those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability.”

Let’s break that down:

In those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply - In other words, as long as countries like China, Russia and India (which are experiencing strong economic growth by the way) are demanding more oil, food and other commodities than the world can keep up with…prices will stay high. Basic economics, nothing new here: Supply vs Demand…too much demand + too little supply = higher prices.

Here’s the part of the quote that got me:

Actions to contain inflation by restraining aggregate demand would contribute to global price stability. - Yes, ok, so this means that if all of the other countries would please restrict their economies just a little, then ours would be fine.

Inquiring minds want to know - How exactly is this going to happen Mr. Kohn? Are you going to jaunt over to China and politely explain to them that this is an election year, so if they could please quit buying so much oil for a little while, it would really help us out?

So why aren’t prices likely to drop soon?

Here’s my take:

1) Suppliers are enjoying their profits - We all like to eat and drive to work, so we all pretty much have to pay the going rate for things. This doesn’t mean we can’t make the price fluctuate at all, but it does mean that once suppliers realize that we can dip into our pocket books that far they are not going to be delighted to cut their profit margin - no matter how unhappy we are about it. Especially as long as the demand for that product is increasing in other parts of the world.

2) Why would the rest of the world curtail their growth to suit America? I’m not saying we don’t have any clout, but I just can’t see a country like China, with a 10% economic growth so far this year, doing anything but steamrolling right over us. I believe that whatever strings we do pull won’t stop the commodities train for long, so if we’re going to jump the eight ball, it’ll be just a little bit closer to election time and it won’t last very long.

So, what do you think? Will food and gas prices drop soon? Give us your opinion in the comments below!

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Written by Connie Brooks | Filed Under Personal Reflections

Comments

3 Responses to “News: Federal Reserve Expects Gas and Food Prices to Drop Soon”

Ethan on June 26th, 2008 2:41 pm
Wow! Thank you so much for clearing the quote up. I had seen the quote earlier today and was just stunned at what Kohn was actually trying to say.

I don’t believe there is anything they can do until the US brings things back. From manufacturing plants to farms and US oil. The US will have to stop allowing imported goods and go back to being independently sufficient at least partly before there will be any long term decreases.

Thanks again,

Ethan
D on June 26th, 2008 5:07 pm
It is sad to hear this, when there are farmers who are getting paid by the government not to farm. 1.3 Billion in the US (2007) was paid to farmers not to grow any food.

The funny thing is farmers want to farm, because of economics simple “Supply and Demand”. Some farmers believe they can earn more than what the government is subsidizing them.

One of the comments that our government has given to us is the need to protect the soil. Being a farm grown boy myself I can guarantee farmers are smart enough to know when to do a crop rotation.

Another kicker of a comment is to protect the market from High Priced farm goods. I myself would not mind to see my weekly food bill go down, (especially with high gas prices hitting my wallet too.)

So, I’m out rage with someone saying with more restrictions and control, stability is in the world economy’s future….lol.
www.buzzflash.net on July 1st, 2008 6:30 pm
News: Federal Reserve Expects Gas and Food Prices to Drop Soon…

Donald Kohn, the Federal Reserve Vice Chairman gave a speech today (6/26/08) at the International Research Forum on Monetary Policy in Germany. In his speech he proposed the idea that fuel and food prices would soon be dropping. To this, Mr. Vice Chair…