Strong printing response can cause inflation. When will the long term rates reflect real inflation ? Real inflation defined by actual prices paid out of pocket without adjustments.
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The price is wrong
Commentary: Inflation is soaring, and the Fed will respond soon
By Dr. Irwin Kellner, MarketWatch
Last Update: 12:13 PM ET Jun 19, 2007
HEMPSTEAD, N.Y. (MarketWatch) -- Will it take double-digit price hikes to convince the markets that inflation is rapidly becoming a major economic problem?
Over the past three months, the annual rate of inflation has been running anywhere from 7% to 11%. That's no typo, folks: Since March, prices have gone up at a 7% clip at the consumer level and at an 11% pace at the producer, or wholesale, level. By contrast, last year consumer prices rose 2.5%, while producer prices inched up just 1.1%.
Of course, I am referring to the headline figure in each instance; in other words, all the prices that are contained in these indexes.
The markets, however, are not at all nervous over this, since they are looking beneath the surface to another measure of price changes -- the "core" rate of inflation.
They assert that today's headline inflation is due mainly to rising prices of food and energy, so it's OK to ignore it and concentrate, instead, on core consumer and producer prices. As you know, these are arrived at by removing food and energy from the totals.
There is no doubt that prices excluding food and energy are going up more slowly than the headline numbers. But I don't know anyone in the real world who doesn't consume food or energy.
What I do know is that U.S. households are becoming increasingly pinched by the soaring prices of necessities. That's why people's moods are turning sour, according to the latest reading of consumer sentiment taken by the University of Michigan.
I also can tell you that, since both food and energy are generally consumed on a daily basis, they have a disproportionate impact on people's attitudes toward inflation.
It stands to reason that price increases on frequently purchased items like food and energy are noticed sooner than price increases on products that are bought only once in a while, like household furnishings or motor vehicles.
It is also a fact that, while it is statistically possible to isolate food and energy from the price indexes, as a practical matter, this is misleading. No item can be viewed in isolation; all are interrelated -- none more so than energy, where rising prices have led to the imposition of surcharges on many goods and services ranging from food to car service to snow plowing.
With this in mind, don't be surprised if workers start asking for bigger raises to make up for the faster rise in their cost of living. And with the labor markets as tight as they are, they're likely to get them, too.
Not all of the markets are sanguine over inflation. The bond crowd, always sensitive to inflation and the expectation of inflation, has already reacted.
Interest rates on the bellwether 10-year Treasury note have climbed more than half a percentage point in the past three months alone. The yield curve is now positively sloped for the first time in a year. See my column of May 29. Also see April 3 column.
And the Treasury-TIPS spread has been trending higher as well.
Since the Federal Reserve many times takes its cues from the bond markets, this is one more reason to expect a rate hike. And with the money supply -- the fundamental factor in inflation -- now rising at the fastest pace in almost four years, such an increase can't come soon enough.
Dr. Irwin Kellner is chief economist for MarketWatch. He also is the Weller professor of economics at Hofstra University and chief economist for North Fork Bank.
Link: marketwatch.com |
