Janice Yellen Says Commodity Surge Just A Spike

Pressured by the need to defend the Federal Reserve against the charge that the commodities surge is its fault, the institution's best-known dove gave a speech in which she said that commodities have ramped up in price more than the U.S. dollar has sunk.

[T]he dollar has dropped about 10% since last summer compared to growth of 40% to 70% in commodities — that prices have grown even when not traded on exchanges and that emerging market central bank’s aren’t primarily responsible for their nations’ fast growth.

Rather, rising global demand and disruptions to supply explain the recent run-up in food and oil prices, Yellen said.

The Fed vice chair stressed that the Fed would not let the inflation genie out of the bottle as happened in the 1970s.

“We are playing close attention to inflation and inflation expectations,” Yellen said.

As is evident from her other statements, she and her likesake are paying more attention to the unemployment rate. She did concede that near-term inflation expectations have risen, but also pointed out that longer-term expectations have not risen as much. She also used the doves' favourite metric: wages have not gone up that much, indicating little wage pressure.


The wage gauge is favoured by those who like to think that 1970s inflation was caused or exacerbated by so-called "cost-push" inflation. The possibility of real wages going down in an inflationary period hasn't occurred to those people. In a way, it's strange that they don't see the possibility. During the Weimar hyperinflation, real wages fell a fair bit: that's why unemployment was so low during the period.

Vice-Chair Yellen's speech may have been her personal opinion, but it's a good bet that it comes from the mainstream take of the FOMC. Why else would the Committee have ignored the rise in gold? They seem to think that Asian demand, propelled by tradition and the wealth effect, is responsible for the metal soaring - with financial crises, not impending inflation, explaining the rest. Today's economic situation may not be precisely the same as the 1970s, but current Fed denial does resemble the denial during that decade.