Yesterday evening, Ben Bernanke announced the action the Fed will be taking to provide a boost to the US economy. QE3, or printing dollars at the rate of $40 billion a month will continue until the US economy has better growth and employment. These are commendable goals but we have to ask: is inflation next?
However, with more dollars being produced month on month, it means the value of each dollar decreases. As the value of the dollar decreases, the value of other currencies relative to the dollar increase, hence the rise in the value of the Euro over the past week, in spite of the Euro having it’s own issues still. The Euro remains the only other credible world currency to the dollar at this time.
More worrying is inflation. The US Dollar is the world currency and all commodities are priced in US Dollars. In theory, assuming a commodity has a constant value, you will need more US Dollars to buy it.
The price of a barrel of oil has been rising. Brent crude has risen from a low of $90 back in April to $117 as I write this piece. It has risen $2 since the announcement of QE3.
The impact on the price of gold has been even more pronounced. After the US employment figures last week, when non farm payroll numbers were weaker than expected, gold rose by $35 an ounce, or 2% in anticipation of QE3. When QE3 was announced yesterday evening, the price of gold rose again. It is now $75 an ounce more expensive than it was at this time last week, a rise of more than 4%.
Suppose these price rises in commodities are representative of things to come. Oil, coal, gas, agricultural products, such as corn, rice, animal feeds, metals like iron ore, platinum and so forth are all going to rise in price, unless there is a corresponding exchange rate fall. As these base commodities rise in price, surely the ripple effect will end up as further inflation for the rest of the world.