Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
All Measures to Combat Global Warming Are Smoke and Mirrors! - 18th Apr 24
Cisco Then vs. Nvidia Now - 18th Apr 24
Is the Biden Administration Trying To Destroy the Dollar? - 18th Apr 24
S&P Stock Market Trend Forecast to Dec 2024 - 16th Apr 24
No Deposit Bonuses: Boost Your Finances - 16th Apr 24
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
S&P SEASONAL ANALYSIS - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Inflation- The Elephant in the Room

Economics / Inflation Feb 22, 2008 - 08:06 AM GMT

By: Money_and_Markets

Economics

Best Financial Markets Analysis Article"The elephant in the room" ... I love that expression. After all, my two little girls enjoy watching the elephants at Lion Country Safari, and they'd love to see 'em show up in the living room.

But right now, the real five-ton elephant in the room is inflation. And no one at the Federal Reserve really seems to want to confront it!


I mean, here we are in the midst of one of the most aggressive interest rate cutting cycles ever. The Fed has slashed rates from 5.25% to 3%, and Wall Street is clamoring for another percentage point of cuts ... at least.

Yet hot-off-the-press figures show that inflation is going through the roof.

Take a look at the chart I made. It shows the year-over-year change in the price of imported goods.

Import Prices Are Absolutely Soaring!

You can see that prices skyrocketed 13.7% in January. That's the single biggest increase since the government started keeping track in 1982!

In just one month, import prices surged 1.7%. And even if you strip out petroleum, you'll see imports were up around 3.6% from year-earlier levels. That means the old, tired "it's just oil prices" argument is a bunch of baloney.

Most importantly, the price of Chinese imports jumped 0.8% on the month. That's the biggest one-month gain on record!

Why is that such a big deal? Cheap Chinese goods have helped keep U.S. inflation lower than it would otherwise be. Now that the cost of those goods is rising, a formerly deflationary force is turning into an inflationary one.

Then there's the ...

Consumer Price Index Explosion

On Wednesday morning, the latest Consumer Price Index figures hit the tape. Overall prices rose 0.4% on the month. The "core" CPI, which strips out food and energy, gained 0.3%. That was the biggest jump in 19 months.

It's not like it was just one or two things driving the increase, either ...

  • Food and beverage costs rose 0.7%
  • Apparel costs climbed 0.4%
  • Medical care costs surged 0.5%
  • Education and communication prices leapt 0.4%
  • And transportation prices jumped 0.5%.

In fact, the year-over-year rate of inflation is now officially hovering at 4.3%. Core inflation is running at 2.5%, well outside of the Fed's 1% to 2% preferred range.

And these are JANUARY figures!

They don't even capture the impact of the latest surge in commodity prices that has occurred so far in February — the one that Sean and Larry have been covering so well.

What Inflation Fears Mean For Bonds and Housing

Fed officials occasionally throw a few platitudes out there about how they're concerned about inflation. But actions speak louder than words.

And frankly, the Fed's aggressive cuts — in the face of $100 oil, $900+ gold, $10+ wheat, $5+ corn, $13+ soybeans and so on — tell you everything you need to know about the Fed's commitment to fighting inflation.

Policymakers are trying to ignore the elephant in the room – inflation.
Policymakers are trying to ignore the elephant in the room — inflation.

Policymakers are trying to ignore the elephant in the room because they're more worried about shoring up the ailing U.S. credit markets. They're hoping the market will just play along with the charade, accept the cuts as a necessary step to save the banks' bacon, and pay no attention to the potential long-term consequences.

But bond traders are NOT buying it anymore!

In fact, they're selling. Long bond futures prices fell a bit more than seven points from their intraday high on January 23 through their low this week.

That's the market's way of telling the Fed that aggressive, short-term interest rate cuts could drive longer-term inflation — and long-term interest rates — higher.

If it were just bond investors getting hit, maybe this wouldn't matter except to some Wall Street investment firms. But the rise in long-term rates could also be yet another headwind for the housing market.

You see, rates on longer-term mortgages — think 30-year fixed rate loans — follow rates on longer-term bonds. They do NOT move with the federal funds rate, which is what the Fed has been cutting.

That means the Fed cuts, designed to help housing, are having the opposite effect — they're driving financing costs on 30-year mortgages HIGHER .

In fact, figures from the Mortgage Bankers Association show that 30-year mortgage rates have increased from 5.5% in mid-January to 6.09% in mid-February.

That surge caused mortgage application activity to plummet in the most recent week by more than 22%. In fact, the MBA index that tracks home purchase loans fell to its lowest level since early 2003.

Bottom line: There Is NO Painless Solution to Today's Problems

Believe it or not, I sympathize with the Fed. I'm glad I'm not in Ben Bernanke's shoes. If he cuts rates too much, he risks driving longer-term inflation higher. If he cuts them too little, the economy could slump even further.

But over the LONG-TERM, the Fed has to put inflation-fighting first. That should be the primary focus of any central banker.

I believe that the Fed needs to let us have a cleansing recession ... let the economy go through a natural period of sub-standard growth ... and allow the financial industry to work its problems out mostly on its own. Yes, that might mean letting some banks fail. But eventually, prices would come down, inflation would fade as a threat, and the stage would be set for a healthier long-term recovery.

Look, throwing easy money at the tech bust just gave us a housing bubble. And now, throwing easy money at the housing bust could very well be giving us another bubble in commodities.

Is that really a path we want to go down as a country? Haven't we seen this movie before?  Don't we know how it ends ... with too much rate-cutting and money pumping just creating new problems to replace the old ones?

I can only hope that the Fed starts to recognize inflation for what it is — an economic elephant sitting in America's living room.

Until next time,

Mike

P.S. We recently made our presentations at the Orlando Money Show available online, and the response has been incredible. If you haven't had a chance to view my segment on the credit markets yet, you still have time. Just make sure your computer speakers are turned on, and click here .

 

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in