Today’s Brew 3-7-07

Excerpt:

Though inflation is traditionally viewed as a monetary phenomenon, Bernanke pointed to demand from China and other formerly dormant countries as major contributors to rising energy and commodity prices in recent years. He also cited a study that showed oil prices in 2005 would have been as much as 40 percent lower absent demand from those economically resurgent countries.

The question then is whether demand itself can be inflationary. No doubt a shortage of oil met by stable or rising demand would drive up its price, along with the prices of oil byproducts. Where this theory breaks down is that if demand for certain products is pushing prices up, demand in other areas must be falling, and in the process, driving other prices down. The net effect of demand-driven inflation is zero.