The most immediate inflation risk relates to the price of international commodities such as oil, steel, copper, and the like. The Fed, and the US in general, has virtually no control over these global markets. US demand for most commodities, even under an optimistic growth scenario, will be inferior to the overall rate of growth of global supply of these commodities. This means that the US will generally be net drag on global commodity prices on the demand side. The marginal demand growth for commodities is coming from emerging nations, and Asian countries in particular.
Very strong economic growth there, combined with very loose monetary policies in those countries, will tend to pressure commodities' prices. Given that demand is relatively inelastic and production capacity is fairly tight relative to current levels of demand in most commodities, strong global growth could provoke major spikes in commodities' prices as demand growth starts to overrun supply growth, and inventories start to shrink appreciably starting in the second quarter of 2010.
Although the US economy has become progressively less commodity intensive over the years, synchronous spikes in commodity prices such as those that occurred in the 2003-2007 period could increase the annual CPI rate by three to five percentage points over any given 12-month stretch. The core CPI could also be affected by 1% to 2% with a lag in such a scenario.
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