There is something about food and commodity inflation that makes macroeconomist very uncomfortable. Here’s my suggestion on the food and commodity inflation. The world is structurally short of food. Modest supply shock cause food prices skyrocket. Most of the people don’t buy food on credit basis. So there is a little monetary policy can do. What kept the inflation down were low manufacturing prices as high investment kept on adding to industrial capacity and technological breakthrough in agriculture. Both are not here just yet. Raising the interest rate definitely hurt the growth of UK economy. I say with confidence that raising the interest rate won’t relieve food inflation. Raising the interest rate may curb demand for other goods that are interest sensitive. In UK where unemployment is still a problem, there is no reason for Bank of England (BoE) to raise interest rates. There are two implications, one for the government and the other for the BoE running QE.
Government: Government should put in measures to block speculative action on commodity prices like blocking short term funds or impose heavy tax on short term funds or withdraw short term funds from commodity market in six months etc.
Bank of England: BoE running QE. Their massive purchases of government bonds perhaps one reason private fund managers who are deprived of both private and public sector borrowers, are forced into commodities. When the private sector is deleveraging due to balance sheet problems, the fund manager is negative at the margin and QE will be unable to increase money supply. No private or public sector borrowers, commodities may well be the recipient of the rebalancing act. I would like to suggest BoE should consider ending QE.
Here’s my bottom-line, UK government should discourage short-term funds from entering commodity markets while encouraging long term funds to enter commodity market to ease supply constraint in the long run. BoE should consider ending QE.
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