Thursday, July 10, 2008

The Fed's Inflation Is Driving Wichita's Raw Materials Costs Up

Dan Voorhis reports in the Eagle that "The skyrocketing cost of commodities is putting the squeeze on many Wichita-area manufacturers and wholesalers.

"The leading commodity indexes have risen between 45 and 55 percent in the past 12 months.

"Commodities are raw materials -- such as oil, aluminum, wheat and lumber -- that make up everything consumers buy."

According to Ken Vandruff in the Wichita Business Journal, "Airxcel manufactures air conditioning and heating equipment for recreational vehicles, schools and the telecommunications industry." To produce RV air conditioners, as does Wichita's Airxcel, you need to buy aluminum, steel, and other raw materials. Aluminum prices are up 18% over a year ago. Dan Voorhis quotes "Gary O'Neal, division manager for Central Plains Steel in Wichita," to the effect that hot rolled steel is up 80%.

I am quoted as placing the blame on the worldwide inflation set off by the over expansion of dollar denominated credit. What the ten wisemen at the Fed seem to have forgotten in their haste to deal with the credit crunch is that a general inflation first shows up in commodity prices. Moreover in the three rounds of accelerating inflation Americans suffered through during the Great Inflation of the 1970s, food price inflation was a leading indicator of general inflation. Our own regional Federal Reserve Bank of Kansas City president, Thomas M. Hoenig, has frequently been an inflation hawk, but he rotated off voting membership on the Federal Open Market Committee in January.

-Malcolm C. Harris, Sr., Professor of Finance, Friends University

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