International Sources of Domestic Inflation

Abstract

There is considerable controversy regarding the sources of the rapid rise in prices that has occured recently in the United States. Some attribute the currenct inflation to inaapropriate monetary or fiscal polices; that is, the inflation is seen as mainly the consequence of an excessively rapid expansion in the money supply and a large deficit in a federal budget. Another factor cited is the large increase in wages and other costs since the ending of controls. Finally, other point to the influence of extraordinary developments ouside the domestic economy, such as the quadrupling in the price of petroleum charged by oil-exporting countries, the depreciation of the dollar, the sale of large amounts of wheart to the Soviet Union and others, and the world-wide expansion in economic activity leading to sharpy rising prices for internationally-traded commodities.

The Federal Reserve Engages the World (1970-2000): An Insider's Narrative of the Transition to Managed Floating and Financial Turbulence

“…The Committee then began to take into consideration that increases in oil prices also contributed to inflation and that it was unwise to ratify those increases via lower short-term real interest rates; see figure 4. The dollar's depreciation and the increase in global oil and other commodity prices spawned a cottage industry in estimating rules of thumb of the effects of such shocks on inflation in which IF staff participated (Katz 1973, Kwack 1973, Berner et al 1974, and Hooper and Lowery 1979. In IF, we were uncomfortable that our rules of thumb, which we used in forecasting, contributed to the opinion that inflation was merely caused by rising prices with little the central bank can do about it.…”