Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market: "Relevant Waves Vs. Irrelevant News" - 10th Jul 20
Prepare for the global impact of US COVID-19 resurgence - 10th Jul 20
Golds quick price move increases the odds of a correction - 10th Jul 20
Declaring Your Independence from Currency Debasement - 10th Jul 20
Tech Stocks Trending Towards the Quantum AI EXPLOSION! - 9th Jul 20
Gold and Silver Seasonal Trend Analysis - 9th Jul 20
Facebook and IBM Tech Stocks for Machine Learning Mega-Trend Investing 2020 - 9th Jul 20
LandRover Discovery Sport Service Blues, How Long Before Oil Change is Actually Due? - 9th Jul 20
Following the Gold Stock Leaders as the Fed Prints - 9th Jul 20
Gold RESET Breakout on 10 Reasons - 9th Jul 20
Fintech facilitating huge growth in online gambling - 9th Jul 20
Online Creative Software Development Service Conceptual Approach - 9th Jul 20
Coronavirus Pandemic UK and US Second Waves, and the Influenza Doomsday Scenario - 8th Jul 20
States “On the Cusp of Losing Control” and the Impact on the Economy - 8th Jul 20
Gold During Covid-19 Pandemic and Beyond - 8th Jul 20
UK Holidays 2020 - Driving on Cornwall's Narrow Roads to Bude Caravan Holiday Resort - 8th Jul 20
Five Reasons Covid Will Change SEO - 8th Jul 20
What Makes Internet Packages Different? - 8th Jul 20
Saudi Arabia Eyes Total Dominance In Oil And Gas Markets - 7th Jul 20
These Are the Times That Call for Gold - 7th Jul 20
A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures - 7th Jul 20
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

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

© 2005-2019 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

6 Critical Money Making Rules