Inflation, at the Core, Is Food and Energy

July 3, 2008

The Federal Reserve claims that it cannot directly control the cost of food and energy, partly because they are pure commodities. It is not until these commodities enter the value added chain that their inflated prices are meaningful. For the purpose of this discussion, I won’t breach the argument as to whether food and energy prices are volatile or just plain up.

Value has to be added to energy through refining and distribution; regardless of whether we are talking about gasoline or diesel for our cars and trucks, or natural gas and electric for our homes and factories. The Fed can easily control the process costs through monetary policy by reducing demand within the US borders. I do not believe the Fed can control the raw cost of energy.

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