Commodity prices and Long Run Inflation

Rachel Layne, of Bloomberg News, has written a number of pieces recently on the squeeze that manufacturers are facing because of rising commodities prices. In the National Post (Nov 12, p. 53 of the Financial Post section, subscription required), she notes that in the U.S., from September 2003 to September 2004, crude materials prices rose by 14%, prices for intermediate materials rose by 8.4%, the finished goods price index rose 3.3%, but the consumer price index rose by only 2.5%.

I'm sure caution is called for in any forecasts. And I'm sure my younger colleagues will have many nits to pick with what I'm about to say. But.....

Even in a highly service oriented economy, and even with tremendous growth and technological change, it's difficult to see how such rapidly rising producer prices won't eventually lead to higher rates of inflation in the U.S. All those federal gubmnt deficits have surely pumped up aggregate demand and put pressure on commodities prices.

With these numbers, what surprises me is that it took so long for the U.S. dollar to lose value.