Do the Financial Actions of Central Banks Affect the Prices of Everyday Items?

I had a friendly exchange with a few economics acquaintances recently, where we were discussing the role (or not) that Central Banks actions had on prices of items in the “real world” (housing, food, energy, minerals, etc).

Particularly, we were discussing whether recent actions by Central banks around the world – to “bail out” various financial institutions, to directly stimulate, to “Quantitatively Ease”, etc, etc – would affect those aforementioned types of items – food, housing, etc…the sorts of things that people in the real world cared about, as opposed to the many varied financial assets and instruments that exist.

One of my acquaintances made the following statement, and what follows that is my response:

Expanding the balance sheet of the central bank can inflate assets prices like property, shares, but not other things.

My response:

I think i understand this enough to agree – but, i think, only in the sense that Central Banks (CBs) do not directly influence the price of “other things”.

I would wonder (and think i have observed, to some degree, even if from afar) if inflation in “other things” is most certainly from the indirect actions of the CBs.

For example, how other entities react when CBs act; or, increased lending from retail banks, after their reserve/capital-requirement coffers have been re-filled with cheap and easy CB money (which, in turn, finds its way back into the real economy via deposits, etc – Steve Keen style, yo).

ie. i’m not so sure i can accept the idea that CB actions in the sense you are talking about them do nothing to affect the prices of “other things” (non shares, non-property, etc).

I can’t argue it eloquently, but i certainly find it hard to believe that the two systems can be quite so parallel, and yet quite so intertwined in every other way but economically (ie. money flows).

At the very least, there would surely be very significant changes in thought patterns, which would influence the “real world” distribution of money, and thus, prices of things in the “real world” (such as food, oil, minerals).

And in an economic climate like this, considering the above sentence, I am confident that many would be buying staple commodities, etc, and selling other things that are “non-essentials” and tend not to hold their value (via relative importance) as well in times of trouble. Sure, some things deflate as well – but we should not assume that people’s purchasing patterns are the same as they were, or even that “they”, for the large part, necessarily bought those things much, or at all, in the first place.

It all means that, from the macro-economic perspective, “the averages are all fine”, and “everyone shouldn’t notice much or any of a difference – so stop worrying” – that perspective makes sense; but from the micro-economic perspective, and in the home, the failure of, again, citing averages, medians, etc, is again apparent, as the reality of non-uniform distributions of quantities once again makes its presence felt.

Hence, at the very least, inflation in the cost of living for real people, in real homes, with real needs, can be relatively inflated, not necessarily by an increase in the base of money (though I suspect that happens somehow, anyway) but by a reactive, non-uniform re-distribution of money/capital/etc as a result of Central Bank actions.

I hope that was interesting!

Regards,
Stewart

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2 Responses to Do the Financial Actions of Central Banks Affect the Prices of Everyday Items?

  1. Timbo says:

    I think your acquaintance has been reading too many Paul Krugman articles. The money that enters the system will be spent directly on assets (shares, property, etc), but those assets are bought from other people, who are now free to spend their newly acquired money in any way they like — the money does not cease to exist once the asset purchase is made. This will raise the price of other items, unless everyone who sells an asset also buys another asset. Your acquaintance is guilty of only thinking of the first step (the new money is only lent for asset purchases), and not the subsequent effects; something Frederic Bastiat was warning about 150 years ago.

    • Stewart says:

      Timbo, thanks for your comments.

      Your comments echo my own instincts and thoughts, about how “funny money” can still enter the real economy, cause price inflation and/or expand the money base.

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