To everyone except those in the financial markets, more inflation should lower the value of a country's currency, since, in the real world, this is exactly what happens. Higher prices mean each unit of currency has less buying power, thus effectively depreciating its value.
But the financial markets are always one step ahead of everyone else (Well, most of the time).
When inflation goes above the government's target, especially in a country such as Britain, whose central bank was given back its independence only 10 years ago after decades of being dominated by the country's elected officials, the financial markets have come to expect that the Bank of England will act promptly to bring it to heel.
This would be accomplished by tightening up on money, thus producing higher interest rates. It is the prospect of higher interest rates, not the decline in its purchasing power, that pushed sterling past $2.
Traders are betting that the Bank of England will lift its base rate from 5.25% to 5.5% when the bank's monetary policy committee meets on May 10.
Guess what? That's just one day after the Federal Reserve's next confab on its key lending rate, which also happens to be 5.25%.
If the Fed does not raise rates, the dollar will continue its fall against the pound as well as compared the currencies of many other countries. Already down some 30% versus the pound since 2001, the greenback has also dropped about 15% against the Japanese yen and is down close to 40% against the euro, just to name a few.
While this may be helping economic growth by boosting our exports, it is also adding to inflation by boosting prices of imported goods. In turn, this is providing a cover for domestic firms to raise their selling prices, especially since tight labor markets and slowing productivity are increasing business costs and pressuring margins.
Monetary conditions worldwide are still loose. Witness the run-up in the price of gold to nearly $700 an ounce, the highest in about a year. As recently as early January, gold stood just above $600.
China's sizzling growth is adding to our inflation by pushing up prices of global commodities, especially oil. And food tags are soaring as more and more corn is used for the production of ethanol.
Back home, the decline in housing is, ironically, adding to inflation by boosting rents. Accounting for one-third of the consumer price index, rents alone are up more than 4% from last year's levels.
As we all know, inflation here in the U.S. is well above the Fed's comfort zone of 2%. The Fed maintains that housing's woes will not spread to the rest of the economy, and thus drag it into a recession.
If that's the case, then a quarter of a point hike to 5.5% may not be enough to bring our inflation to heel.
They probably took notes and got a quote out of context. I can see how it has been misleading to you.