Inflation Looming

The telltale signs of economic trouble on the horizon.

The American people may be smarter than the financial wizards at the Federal Reserve. Chairman Ben Bernanke Dec. 9 said he will try to jumpstart the economy by printing another $600 billion. But most people don’t think he can control inflation or rising interest rates.

A new Rasmussen Reports national telephone survey finds only 38 percent of respondents are even somewhat confident the Fed will be able to keep inflation under control and interest rates down. Some 72 percent are either “not confident” or “not at all confident.”  Eighty percent are at least somewhat concerned about inflation.

Appearing on CBS’s “60 Minutes” program Dec. 5, Fed Chairman Bernanke called inflation fears “way overstated.” He said he could act quickly enough to keep prices in check. The Fed Nov. 3 had announced that its purchase of $600 billion in government bonds was to prompt people to spend more and give the economy just a touch of inflation—maybe 2 percent.

As for printing money to accomplish Fed goals, Jim Grant, editor of Grant’s Interest Rate Observer writes:

Bernanke would have us believe the Fed can calibrate inflation....One day the Fed will wish inflation were only 2 percent. Don’t you sometimes get the feeling that the economists are pulling our leg? As bartenders would call it "watering the whiskey"....More dollar printing simply dilutes the buying power of all dollars. And so we see today the beginnings of a full fledged inflation.

Commodity prices tend to be “the first signals of excessive liquidity and possible future inflation,” The Economist commented last month. In past inflationary episodes, commodity prices always rose first as they are dominated by existing stocks which have inelastic supplies. A second reason is increasing demand for many commodities by the fast-growing, emerging countries in Asia and Latin America. “I expect what is driving most of the current run up in commodity prices,” wrote Michael Bordo, Rutgers University professor of economics, “is the US’s expansionary monetary policy and fears of global inflation in the future.”

As most investors are well aware, the price of gold has nearly quadrupled, and other precious metals and securities based on precious metals have risen, partly because of the loss of status of the U.S. dollar and the fear of inflation.

The Wall Street Journal recently reported: “Across corporate America, more companies are wrestling with when and how much to raise prices as raw materials costs climb.” The increases pose problems as consumers resist increases. General Mills said it will increase prices on a quarter of its breakfast cereals “as a result of rising grain and other commodity prices.”

General Mills is certainly not alone. United Technologies, which builds helicopters, jet engines, elevators, and air conditioners, expects to increase its prices. Domino’s Pizza said cheese prices are up 29 percent and headed higher, according to the pizza chain’s finance chief.

Wheat was 34 percent higher in September than the year before. Corn also was up 34 percent. Milk was 32 percent higher. Copper was up 30 percent in the September to September measurement. The large chain stores see their costs climbing and are “growing nervous” about the prospect of passing those higher costs along to price-conscious customers, The Wall Street Journal story said. One chief executive was quoted as wondering “how customers will react to price increases."

The Fed’s plan to print $600 billion and buy U.S. treasuries from banks and investors to drive down interest rates was intended to be a “mild steroid” for our weak economy. Instead, “it’s been a powerful steroid for critics of the U.S. central bank," said a story in The Atlantic.

Several economists in an open letter to Ben Bernanke urged him last month to discontinue the second round of so-called quantitative easing (QE2). As one of the signers, Kevin Hassett, director of economic policy at the American Enterprise Institute (AEI), said, “There’s the possibility that the Fed will have a hard time withdrawing the stimulus when inflation increases.”

More dollar printing simply dilutes the buying power of all dollars,” as Gold News describes it. “Inflation is coming. In fact, in many ways it’s already here, just not yet widely recognized. Deflationists still hold sway in the bond market.” Yet every day evidences show the dollar is buying less.

Higher government borrowing costs have “driven mortgage rates to their highest level in six months,” The Wall Street Journal reported Dec. 10, challenging the Fed’s efforts to energize the economy. Meanwhile, some are wondering whether the price of farm land is climbing too fast. Sheila Bair, chair of the Federal Deposit Insurance Corporation posed the question in an October speech, the Associated Press reported. The value has risen 58 percent since 2000 in inflation adjusted terms, she said.

The government standard for measuring inflation is the Consumer Price Index for urban consumers. Over the past year, it has increased only 1.2 percent. But that’s the so-called “core” figure. It excludes food and energy. Also, it queries only 87 percent of the urban areas, about 4,000 households and about 25,000 retail establishments, filling stations, supermarkets, and hospitals.

But gasoline has gone up (October 2009 to October 2010) 9.5 percent, fuel oil, 14.5 percent, used cars 8.6 percent, medical care 3.6 percent. So, the CPI is really an incomplete gauge of inflation.

As Forbes Magazine publisher Rich Karlgaard wrote Dec. 2:

Bear in mind that the official scorekeeper for CPI inflation is the U.S. Department of Labor, whose head is politically appointed...At the same time, the Fed...wants higher prices...[I]t boggles the mind to think the Fed goes along with the Labor Department’s exclusion of food and energy prices in the CPI.

It does cause one to wonder -- when prices already are flying up higher than the wages or salaries of most Americans. Folks are beginning to wise up and discount Washington’s political experts.