March 14, 2011

More QE Would Add Fuel to Inflation Fire, Economist Says

Food prices are continuing to climb - the chief executive of Sara Lee's North American retail and food service business said Monday that the company was preparing its fourth price increase of the current fiscal year. Is this a preview of greater inflation, and what has caused it? Should the Federal Reserve continue with its bond purchases? Economist Steven Horwitz analyzes the situation:

“It is possible that we are beginning to see the inflationary effects of quantitative easing, but it is very difficult to separate the current geopolitical and natural effects from the monetary stimulus effects,” Horwitz said. “There are so many things that are affecting prices right now – from unrest in Northern Africa, to the earthquake in Japan, to difficult crops in Mexico, wise economists are cautious to point to any particular cause.”

Horwitz is concerned about inflation as a result of the Fed pursuing more bond purchasing.

“Given the numerous other factors driving up prices at the moment, yet a further round of quantitative easing would be like the Fed putting gasoline on a fire by increasing the money supply and thereby driving up prices even further," he said. "To the degree that prior monetary expansion is already a major cause of those rising prices, it’s a fire that the Fed itself started and does not need to worsen.”