When you start the printing presses, you had better be prepared for the inflationary consequences. In the past week, the US has not just loosened the belt on monetary policy -- it's gone from a size 34 to a size 6XL waist line. Already, the commodity markets are reacting. Consider this Bloomberg article from Friday that notes commodities are surging "on speculation that the Federal Reserve's steps to revive the U.S. economy will spur demand for raw materials as a hedge against inflation". By offering to "buy more than $1 trillion in government and mortgage debt to help end the recession and credit crisis," the Fed is moving into unprecedented territory when it comes to running overtime shifts in the print shop.
Many companies I speak with have been happy these past few months to ride commodity prices down as the metals, oil, energy and plastics-related markets have plunged. Rather than pursue sustainable cost reduction programs on the value-added portion of their spend, they've sat back and watched the savings roll in as volume levels have dropped 50% and more in some markets. Well, my friends, just as hope is not a strategy when it comes to the economy, wishing away inflation is not a strategy when it comes to cost reduction in sourcing and procurement. Get ready for rising commodity costs. Whether it's this year or next, I see no way -- given that the Fed or anyone else will be able to take these new dollars out of circulation -- of curtailing the money supply to a level that can ward off the inflation that these new actions will have to bring from a textbook monetary policy perspective. Commodity inflation will be unavoidable and we all need to prepare for it.