When the Federal Reserve pumped billions of dollars into the economy with quantitative easing last week, investors rejoiced. But for consumers, the Fed’s monetary stimulus is a tax that has caused the price of oil, food and clothing to rise. QE2 made the stock market rise, but the Fed’s bond buy has also sent commodity prices for oil, cotton, corn, sugar, wheat and coffee to new highs.
The Fed’s tax on consumers
Commodity prices shot upward as early as September with mere hints that the central bank would launch a round of quantitative easing to stimulate the economy following the midterm election. QE2 was great news for people with money to invest in stuff. However, people and businesses that have to buy gas and groceries have less money to spend on other things that will stimulate the economy. Some economists warn of “stagflation,” an economic condition where prices rise without economic growth. If the price of oil and other commodities is driven higher just because the Fed is printing more money instead of improving demand, QE2 could backfire big time.
QE2 drives up gas prices
The most obvious example of the QE2 Fed tax on consumers is oil. The day after the Fed announced QE2 last week, the price of oil rose above $85 a barrel. Crude oil, gasoline and heating oil hit six-month highs. Oil companies are cheering, but consumers have less money in their pocket. The average American family spends about 10 percent of its income on gasoline and utilities. Consumers spend $340 billion a year on gasoline alone. Since late August the price of a gallon of gas is up 4.8 percent. As Fed money floods the economy, another 10 percent increase would divert another $51 billion from other sectors of the economy.
QE2 raises prices for clothes and food
The QE2-driven spike in commodity prices has sharply affected commodity-dependent industries. USA Today reports that Kraft Foods and Starbucks are raising coffee prices after that commodity reached new highs for the year last week. Jones Apparel Group and Hanes brands will raise prices to compensate for higher cotton prices. McDonald’s is reported to be raising menu prices in 2011 due to rising costs for meat and sugar. If food prices rise as little as five percent, the average family will spend about $350 a year more on groceries.