Monday, May 01, 2006

More Evidence Price Inflation Is Picking Up

The evidence is clearer than ever that price inflation in the U.S. is picking up significantly. Even the so-called PCE deflator, which is generally the inflation measure showing the lowest reading, saw a 0.4% increase on the month before in March. Given the sharp increase in oil prices in the latest month, it is a virtual certainty that the increase is going to be much bigger in April. And, the "core" PCE deflator -which the Fed have indicated it follows- saw a unusually large increase of 0.3%.

Meanwhile, the ISM price index in its manufacturing survey rose to 71.5 from 66.5.

The latest market developments, with commodity prices soaring across the board and the dollar falling against most other mayor currencies is likely to continue to put further upward pressure on price inflation. As I wrote yesterday, the Fed will "fall behind the curve" and see price inflation get out of hand if it pauses soon. Indeed, they might just do it even if their gradual tightening continues.


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