Wednesday, May 17, 2006

Markets Finally Realizing That Inflation Is Rising

Today there have been a massive sell-off in global bond and stock markets due to today's CPI report which showed a monthly increase of 0.6% in the all-items index and a 0.3% increase in the so-called core index, both of which where 0.1% higher than analyst's expectations.

Had they read this blog, they would have of course already anticipated this number. With the dollar falling, with commodity prices going through the roof, with labor costs increasing faster and with rents rising as the last few year's price boom have made owning a own home increasingly unaffordable, there is really only one way that price inflation can go: up.

So it is really a near certainty that price inflation will continue to rise. While there may be a temporary pause in that trend (at least in the official CPI and PCE deflator numbers) during some month, the above mentioned factors ensure that the trend will remain rising.

That in turn ensures that the Fed will have little choice but to keep raising interest rates, even though it knows that course of action risks sending the U.S. economy into a recession.


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