Growing economies could contain inflation by curbing their appetite for commodities, the vice chairman of the Federal Reserve said in a speech Thursday.
Donald L. Kohn, speaking at the International Research Forum on Monetary Policy in Frankfurt, Germany, said the recent run-up in food and fuel prices doesn’t seem to be developing into long-term overall inflation, but policymakers must be alert to that possibility.
”Additionally, in those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability,” he said.
While he did not name any nations in the speech, growing demand for fuel, especially from China, has been one of the factors in the near doubling of petroleum prices over the last year.
The speech comes at a time when world leaders have become more critical of other nations’ commodity policies. While U.S. policymakers have pointed to rising demand from China and India as a factor in higher fuel prices, other world leaders have blamed U.S. ethanol policy for contributing to food inflation. Ethanol processes food such as corn to be used as fuel.
Kohn finished the speech with another comment that could be directed at China, which critics say has kept its currency artificially low.
”Economies benefit from having independent monetary policies that provide room to respond flexibly to alternative configurations of economic and financial shocks,” he said. ”These benefits could be increased if exchange rate flexibility were to become more widespread and monetary policies given greater latitude to respond to shocks wherever they originate.”