All throughout 2007 I've been saying that the CPI numbers have grossly understated the inflation we are witnessing in the US.
It seems after every FOMC meeting, we heard comments like "core inflation has improved modestly", or "core" inflation has "modestly improved". What a bunch of garbage!
Courtesy of Barron's/Econoday
This morning the Labor Department reported that consumer prices rose 0.4% in January. The problem, which is a direct result of energy prices, and the alternative energy fix, was food inflation which rose 0.7%.
Energy Problem Translates into Higher Food Costs
Chart courtesy of Bill King, M. Ramsey Securities
Farmer's are getting squeezed by higher fuel costs to operate machinery, and supply and demand issues for food are getting out of balance. The rising demand for ethanol has causing corn prices spike.
Corn is being used to make ethanol (it's really moonshine) instead of feed, and corn meal. Feed costs for cattle, hogs, and chicken have risen which translates into higher prices for dairy products, as well as beef, pork, and chicken.
Since farmers want to produce what is in demand, they are growing corn, and neglecting wheat. Now wheat prices are rising because demand is outstripping supply.
Lower Dollar Makes Energy More Expensive
The skyrocketing price of Gold and Oil are a direct result of inflationary pressures caused by the depreciating the value of the dollar. Until the dollars woes modestly improve, inflation will remain a serious problem.
The US Government is depreciating the value of the dollar by lowering interest rates, and throwing money in the banking system to ward off a liquidity crunch. Once the balance sheets of the major banks are repaired, interest rates will rise.
The Fed is clearly focused on solving the banks problems first, but fixing one problem while ignoring another often causes a whole new set of mistakes that could result in a more painful consequence.
My guess is 2009 and 2010 will be an excellent time to buy bonds. The Fed will aggressively address the inflation issue once banks have solved their liquidity issues, so if I were a large holder of lower yielding bonds, I would reduce my holdings now, and over the next 6 months.
Clearly investors are concerned that inflation will continue to rise as the economy weakens under tough credit conditions. This phenomenon is known as Stagflation which "describes a period of inflation combined with stagnation".
The Commerce Department said that housing starts for January rose 0.8 percent. The December number fell 14.8 percent after being revised down. Building permits fell by 3 percent.
This morning crude oil fell $1.28 to $98.73 a barrel after closed above $100 for the first time on Tuesday.
Despite record high oil prices, many integrated oils and drillers remain well below their 52 week highs. This adds some validity to my theory that investors sense a political shift in Washington which may be a big negative for the oil majors.
I said in the weekend "Briefing" that "A windfall profits tax will be a major negative for oil stocks while ETF's containing oil futures will prosper".
