Kudlow’s Money Politics

‘This Inflation Speed-Up Must Be Taken Seriously’

U.S. economist John Lipsky, who is the first deputy managing director of the IMF, is giving a speech today before the Council on Foreign Relations in New York that warns of the spread of global inflation. Lipsky says, “This inflation speed-up must be taken seriously, as it creates potentially significant challenges to economic stability that could undermine prospects for restoring the combination of solid growth and low inflation that prevailed earlier in this decade.” He goes on to say, “To put the issue starkly, inflation concerns have resurfaced after years of quiescence.”

Lipsky, a former Wall Street economist and periodic Republican advisor, fingers the commodity boom as the main inflation culprit. I have written that since last autumn, I have become worried about inflation for the first time in ten years. The CPI has increased by 4 percent over the past five months. And I will finger the run on the dollar as the chief inflation culprit.

Along with the Fed’s excessive interest rate cutting, the emergence of the U.S. peso is the biggest driver of rising commodities and inflation.

Dick Fisher of the Dallas Fed has suggested that the central bank’s target rate should have stopped at 3 percent, not 2 percent. I agree. And the weak dollar has forced world central banks into the over-creation of liquidity.

So again I come back to my theme of the need to restore King Dollar. The U.S. neglect of the dollar is causing global inflation and an unnecessary commodity-price boom — especially oil, but also food prices. Oil has become a substitute for the cheap dollar. Of course, so has gold.

Speaking of gold, its rise in recent months has been corroborated by the spike in the CPI. A simple gold forecast model of future inflation has only missed by three-tenths of 1 percent over the past six years as the CPI has roughly doubled from 2 percent to 4 percent.

What’s ahead? The model predicts nearly 6 percent inflation in 2008 and 7.5 percent inflation in 2009 and 2010. After that, inflation falls back to 6.5 percent in 2011 and 5.5 percent in 2012.

The point is, the inflation outlook is worsening. Let me say again: We need to revive King Dollar. It’s gonna be a big election-year issue.

Sen. McCain, are you listening?

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