Too Much Inflation For You? Stop Eating and Driving!

Wednesday, July 18, 2007

A down-spike in oil prices in June helped to lower the headline inflation reading for June. According to the BLS consumer prices rose only 0.2% after a 0.7% step in May. The seasonally adjusted compounded 3-month annual rate of inflation receded to 5.2% (5.5%) in June.
If that is too much for you, just stop eating and driving. Food and energy prices are skyrocketing and the fundamental outlook in these sectors points to the possibly worst drought since the "Dust Bowl" of the 1930s and not much chances for oil supply to keep up with demand with a high risk of delivery disruptions. Shopping can still make you happy though. Apparel prices fell. Now if it were not for that credit card bill to come afterwards.
Federal Reserve chairman Ben Bernanke said in his testimonial to Congress that inflation is still a cause of worry for the Fed, a statement that drove the Dow Jones 1% down from its record reached yesterday. He nevertheless expected an improvement of both growth and inflation in 2008, stating that the Q4 2007 may see lower growth again. Yesterday's release of an uptick in industrial production, albeit at lower capacity utilization YOY and a slower advance of producer prices delivered a mixed short-term message though. He was further contradicted by the National Federation of Independent Businesses (NFIB) which saw 19% of their members raise prices, according to a report on Bloomberg TV.
Bonds nevertheless rose with the 10-year Treasury yield dipping 8 ticks to 5.08%. Gold jumped more than 1% above the $670 level and the Federal Reserve dollar marked a new low against the Euro at 1.3830.
After Bernanke's speech from May 10 where he introduced a new target for the Fed, inflation expectations, I am inclined to take the view that the Fed will try to ride out the mortgage storm it cooked up itself by not monitoring (and improving) standards in the subprime industry and leave rates unchanged in the coming meeting on August 7. Higher rates could mean a fatal end to record stuck purchases on margin and the weak housing market would decline further. But seeing that the Fed shifts its focus from portfolio-slimming inflation to the highly psychological and foggy area of inflation expectations I feel more uncomfortable than ever as this talk could easily get contradicted by the markets walk.
The white noise of monthly and quarterly data releases adds up to the uncomfortable perception on US economic growth that is strengthened by the fact that policymakers so far have not come up with much more than to blame the rest of the world.
Pushing for a higher Chinese Yuan while at the same time trying to coerce China into buying mortgage-backed securities may add to confusion over US policy in that corner of the world.
At the same time structural changes to turn the deficit-laden fiscal policy around remain yet to be seen. The US government now employs as many people as does US industry.


Wikinvest Wire