The document discusses concerns about rising inflation from monetary policy actions taken by central banks like the Federal Reserve and Bank of England. While inflation has been low since the 1970s, easy monetary policies for extended periods risk wage inflation becoming embedded in the economy, which is very difficult to reduce. The Bank of England faces this dilemma as inflation forecasts are rising even as economic growth remains weak. The author worries the Federal Reserve may ignore inflation risks in trying to spur job growth through monetary actions.

1. http://www.investmentcontrarians.com/inflation/inflation-about-to-become-a-
massive-headache-for-central-bankers/811/
Inflation About to Become a Massive
Headache for Central Bankers
By Sasha Cekerevac for Investment Contrarians | Oct 15, 2012
With the recent new monetary policy initiative by the Federal Reserve, one area that I’m
becoming more worried about is the impact this will have on inflation. While inflation has
declined from the highs in the 1970s, there is always the worry that monetary policy could ignite
the flame of higher prices in the future.
The problem with inflation is that once it becomes imbedded within a society, it is extremely
difficult to eradicate. While commodity inflation is troublesome, it’s not the biggest worry, as
those prices can quickly adjust. It’s not difficult for the price of wheat to decline if there is a
large crop, for example.
The problem with monetary policy actions that are too easy for too long is that inflation starts to
creep into wages. Once you have wage inflation, it is extremely difficult to remove from the
system. While the price of wheat can decline 10% quite easily, wages cannot move in such a
manner.
So far, wages have not moved at all. This is due to the slack in the economy. The slack denotes
the difference between current and potential gross domestic product (GDP) growth rates.
Monetary policy action is used to help decrease this gap, to adjust it to prevent inflation from
occurring. The problem is that this is not an easy task.
The other question is: what happens if inflation is rising but the economy does not increase its
pace of growth? Should monetary policy action remain accommodative? This is the current
dilemma for the Bank of England.
The Bank of England has an inflation target of two percent. They, too, have their own
accommodative monetary policy plan, which is set to be completed next month. The problem is
that a Bloomberg survey has an average inflation rate of 2.3% for England during the second
quarter, and in the third quarter Bloomberg expects an average inflation rate of 2.2%, from those
surveyed. (Source: “King Faces Dilemma as U.K. Inflation Forecasts Rise: Economy,”
Bloomberg, October 11, 2012.)
The Bank of England is now facing a problem: many market participants are expecting higher
inflation, even though the economy is still weak. This is yet another example that monetary

2. policy initiatives are quite limited in the extent of how much of an effect they can have on the
broader economy.
I think this is going to be a real worry for the Federal Reserve next year. Even though the Federal
Reserve has a dual mandate of price stability (meaning low inflation) and full employment, I
hope they don’t ignore the inflation side just to try to create jobs.
The good news is that, recently, the Federal Reserve has been able to sterilize the monetary
policy adjustments so much that the adjusted monetary base has declined over the past couple of
months. For those who would like to see the details, the Federal Reserve Bank of St. Louis has
great data available on its web site (www.StLouisFed.org).
In fact, if one were to graph the adjusted monetary base against gold, you would see a very high
correlation. The only concern for gold investors is that during the last couple of months, the
adjusted monetary base has declined while gold has continued going up. Perhaps the latest stall
in the price of gold reflects the decrease in the monetary base and gold is about to pullback. Only
time will tell.
In the long run, if an economy has high inflation, the net result is turmoil and uncertainty for
businesses. And with the current political instability in America, we can all see that uncertainty
is probably the biggest job-killer of them all.
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