Brenanke vs. Buffet: Clash of ideology

2008-06-30 15:51:12 (GMT) (Caymanmama.com - Business News)

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New York City, New York (CaymanMama.com) — It seems that the chairman of the Federal Reserve, Ben Bernanke, is eagerly waiting for Warren Buffet to be wrong this time. Warren Buffet, who is the Berkshire Hathaway billionaire investor, said on Wednesday that the “exploding” inflation is one of the biggest risks to the economy. Buffet told CNBC, “I think inflation is really picking up, it’s huge right now, whether it’s steel or oil. We see it everywhere.”

Indeed, the price of food and milk has shot up and the price of gas has seen a rise of $4 per gallon. Amidst all this, Dow Chemicals has twice in the past month announced that it is increasing its prices due to the rising prices of various commodities.

However, Bernanke feels that after nine months of cut interest rates and lending loans to various financial sectors, it is not planning to reverse its course by pushing higher rates in order to tame the price rise. The reason behind such thinking is that the Federal Reserve is skeptical of the fact that prices will cause a ripple in the economy while offering higher wages.

According to the Federal Open Market Committee, “The committee expects inflation to moderate later this year and next year.” However, amidst the Federal Reserve’s view on price rise and inflation, price rises lead to loss in purchasing power due to the money policy. This is due to the shift in the demand and price changes.

In case of a rising commodity demand due to high growth rate, the price rise should affect accordingly. However, according to the Federal Reserve, the rising prices will not lead to inflation unless and until workers start looking for an increase and companies offer them high prices. Well, there has not been an increase in wages as due to decline in unionization, there is weak bargaining power.



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