Thursday, December 14, 2006

Does a falling dollar cause inflation? Will the Fed care?

The following thought that came to mind is a simple one....does the lower dollar cause prices increases that result in increases of inflation that the Federal Reserve will work even harder to squelch?

First, I have heard that our new Fed Chairman is the kind of person who "targets inflation" as the main way to judge the need to stimulate or slow the economy. The idea is that a "hot" economy would stimulate demand for labor that might the be in shortage which would cause wage and shortly thereafter, prices to rise.

Second, I think everyone can plainly see that a vast sum of common goods for sale here in the USA are made elsewhere. If the dollar continues to weaken, it means other currencies are getting stronger and this means that the price of goods being imported is going up. If this is true, then I would think that companies selling these products can only able to absorb those increases for a short amount of time...and will than begin raising prices.

It would seem to be that those price increases would result in ever increasing inflation which is what the Federal Reserve would be triggering on.

Would the Federal Reserve see this increase and automatically decide to try to slow the economy down to counteract the price increases. Could those attempts show it down more than it really should be.

I am sure the Federal Reserve takes a large number of facts and figures into consideration....they probably release simplified remarks to us because releasing more would not benefit most of us.

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