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The Fed is Wrong…Inflation has Arrived


Sy Harding

Fed Chairman Bernanke says inflation is still benign and not a concern. He’s wrong! And he’s behind the curve, dangerously so!

Inflationary pressures have been rising and recognized in many major global economies for quite some time, which has had their central banks raising interest rates and tightening monetary policies in efforts to bring rising prices under control. So far without effect, thanks to the intensity of the inflationary pressures.

China began raising interest rates and tightening policies almost a year ago, and has become more aggressive recently as the efforts so far have had no effect whatever. Similar inflationary concerns and efforts to cool off rising prices in India have spread through the rest of Asia, into Russia, over to Brazil and the rest of South America, and into Africa.

This week in Europe, the United Kingdom reported that its annualized rate of inflation jumped to 4% in January, up from an already worrisome 3.7% in December. The 4% level is double the Bank of England’s stated ‘comfort zone’ of 2%, which by the way is the same as the Fed’s stated comfort zone.

The Fed looks out the rear view mirror and says that the ‘core rate’ of inflation, that is with the cost of food and energy removed, is up only 1.6% over the last 12 months, well within the Fed’s comfort zone.

The Fed needs to look out the windshield at what’s coming down the road, not through the rear window.

Yesterday in the U.S. it was reported that the Producer Price Index (PPI), measuring inflation at the producer level, jumped an unexpected 0.8% in January from December, and the ‘core rate’ jumped 0.5%, more than double the consensus forecast of economists, and the fastest monthly pace of increase in two years.

And it looks like it’s moving on from producers to consumers. This morning it was reported that the Consumer Price Index (CPI) was up 0.4% in January. The Fed will take comfort that the core rate was only up 0.2%, an annualized rate of 2.4%. It was however, also double the consensus forecast of a rise of only 0.1%.

Meanwhile, the World Bank president warned yesterday that global food prices have hit “dangerous levels” that could create political instability in many parts of the world. The bank reported that global food prices have jumped 29% over the last 12 months.

Commodity futures, particularly in the areas of corn, soybeans, cotton, are pointing to still higher prices ahead. And agriculture experts say there is not enough global growing capacity to bring prices down any time soon.

Yesterday, CitiGroup CEO Vikram Pandit warned that “Many emerging markets are operating at or near capacity and are therefore at risk of overheating – and must deal with the possible consequences of inflation.”

The release of the minutes of the Fed’s last FOMC meeting revealed that some Fed governors suggested last month that the Fed scale back the remainder of its QE2 program on concerns that the continuing easy money policy could create an inflation problem. Countries around the world have complained since the Fed’s QE2 announcement that it would worsen already worrisome global inflationary pressures.

But the Fed Chairman is fixated on trying to fix the high unemployment problem in the U.S. by pumping up an already recovering economy, and in the process has his head in the sand regarding inflation.

It looks like once again the Fed will be dangerously behind the curve on a bubble, as it was in the stock market and housing bubbles. This time it is the inflation bubble, particularly in commodities.

The historic hedge against inflation – gold!

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