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Saturday, October 13, 2007

USA, the inflation crossroad

The last days, I have started realizing more and more the inflation's rise. In the store I used to buy my morning muffin for $1.25, now it costs $1.50 and a sign in the back, stating that "Food inflation has forced us to raise the prices":). Wow, these guys have taken Economics 101. Then walking in the Mediterranean store, another inflationary problem due to the Euro exchange rates, the owner, upset and worried, told me that he changed the prices 4 times in a week, WOW! Is that a random effect? Certainly not, the US prices are pushed higher either from the dollar's value decline over Euro, almost 1.43, compared to the last year's 1.21. The Americans are paying this, but their salary is not increased 4 times per week.

How about China? Based on recent economic data, we are importing inflation from China. Based on NY Times, Chinese inflation in August was the highest monthly rate reported since December 1996. The spike in food prices, which were up 18.2 percent from August 2006, is especially worrisome because food costs particularly hurt China's poor majority. That causes lots of instability, no matter the 11.9% annual economic growth. The government has raised interest rates four times this year to try to restrain the boom and has imposed investment curbs on the auto, textile and other industries. But these measures are requiring longer than expected to take effect.

USA is in the middle, a crossroad, in the mercy of the Chinese inflation, with imports from China rising 16.7 percent, to $20.9 billion and presenting a trade surplus. Also in the mercy of the US/Euro fluctuations, a real headache for the trade dealers. We have also the housing market status that is creating a problematic and chaotic inflationary landscape.

But definitely, the Fed's role is to protect the public interest and also the consumer, but triggering the interest rates is not the solution or it is not enough. New international trade agreements should emerge and more economic consultation to China to resolve their economic chaos. EU is still looking to identify itself over the USA, but this needs to be done and ultimately increase the value of the dollar over Euro and bring it back to the reasonable 1.10 or so.


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