Earth to Central Bankers: CEOs Say Inflation is Not a Threat

The chattering class that’s spending so much time wondering what kind of inflation policies new Federal Reserve chief Ben Bernanke [...]

December 14 2005 by Chief Executive

The chattering class that’s spending so much time wondering what kind of inflation policies new Federal Reserve chief Ben Bernanke will have ought to stop for a moment for this word from America’s CEOs: inflation is not a problem. And it’s not going to be a problem for the foreseeable future.

CEOs attending the 7th Annual Leadership Summit in Palm Beach, Fla., organized by Chief Executive magazine, were unanimous in arguing that globalization of production and financial flows, combined with new technologies, means that it’s not possible for the vast majority of companies to raise prices. €˜I don’t think there are deeply embedded, long-term inflationary trends,’ said Dick Syron, CEO of Freddie Mac. €˜There is something to be said for this enormous increase in worldwide capacity to produce goods and services–and not only to produce them, but actually to deliver them effectively. It really does put us in a better situation in the longer term for inflation than one might think.’

China’s emergence is one factor that must completely change the U.S.-only models that so many economists rely on. €˜A year ago, we had very sharp rises in steel prices,’ said John Castle, CEO of Castle Harlan, the private equity firm. €˜They were up almost 80 percent and even 100 percent in some cases. But it appears that the capacity from China has resulted in steel prices being somewhat softer. There’s clearly a different animal, a different situation.’

George David, CEO of United Technologies (Otis elevators, Carrier air conditioners, Pratt & Whitney engines, Sikorsky helicopters and other units), said he believed that globalization and productivity gains would continue to overwhelm inflationary pressures. €˜We’ve had commodity cost increases, primarily metals, in the past two and a half years and with basically no pricing (power) until the second and third quarter of this year,’ said David. €˜We got some price recovery in Carrier, which is the most commodities-intensive company we have. But everybody else (other units of UTC) has had real price declines. It’s all about productivity. That’s what things are broadly good.’

Jim Owens of Caterpillar, the manufacturer of construction and agricultural equipment, argued that the real macroeconomic danger is €˜the over-reaction by the central bank to the perceived inflationary concerns.’ His company is one of the largest buyers of plate steel in the world and prices are €˜definitely declining right now,’ he said. €˜Productivity growth and a global economy that wants to grow augur pretty well really,’ said Owens. Another concern is that Washington would enact legislation that is anti-China or anti-trade.

In short, CEOs don’t believe in the inflation bogeyman and they’re the people who make the global economy go round. So it may be time for the Federal Reserve to stop raising rates.

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