Sunday, June 15, 2008

The Big Problem

You mean that inflation is not under control?

I found it laughable last month when April's inflation numbers came in "lower than expectations" and all the talk of the bottom being behind us was abound. It was laughable because in May we had seen energy prices sky rocket to all time highs on a daily basis.

How could so many people not see it? They were looking back at a report when the current picture was dramatically different. It is the problem with all reports, as I have said before, are backwards looking. It is like driving a car when all you can see is only where you have been and not what lies in front of you.

I have a hint for you. June's inflation number will be fairly muted and either hit or be below the consenus estimate. The only reason it won't is that food prices will continue to rise in the next couple of weeks in response to the flooding in Iowa and Indiana.

The whole, "Oil will hit $150 by July 4th," has some way to run. I don't know. I don't follow it that closely, but it sure doesn't seem like oil has the gusto at this moment to hit $150 in the next couple of weeks, but it still may hit it sometime this year.

As for my friend, the Fed. Well, frankly, you're screwed. You have no plays. You can't lower the rates anymore because the dollar will continue to fall and inflation will continue to rise. That's no good and they have FINALLY admitted as much. You can't raise the rates right now because of the housing slump and banks still really need the liquidity to stay afloat and that little thing called the Presidential Election.

So, the answer is that the best plan of action is no action at all and bluff and blow hard that you are going to raise the rates aggressively as needed. Which you will have to do to curb inflation. Look even the low-ball government estimate is putting inflation at just a touch over 4%. The current Fed rate stands at 2%. The rates will have to be HIGHER than inflation to curb stem it's tide.. Little .25% increases will not cut it.