Is Inflation Here?

We got some very interesting inflation data
yesterday. In the
U.S., the Producer Price Index (PPI) rose 0.4% in October, when
expectations were for a 0.8% increase.

But if you strip out energy and food prices, the
so-called “Core PPI” actually fell 0.6%. Computer and car prices were
cited as the main source of pricing weakness.

We know this weak pricing environment is exactly why
the Fed started a new round of Treasury purchases, known as QE2. It’s the
second time the Fed has engaged in quantitative easing.

The goal is to push cash into the system, boost
prices and profits and spur hiring.

That sounds good, if it could work. The problem,
demand is down due to high unemployment and households are still getting
debt levels in order.

The Fed is pushing on a string. There’s not enough
demand to pick up the slack. And that sets the stage for the flood of
cheap money to be mis-allocated.

In other parts of the world, we are seeing a different inflation picture.
consumer prices are up 4.4% year over year. But there are pockets where
Chinese inflation is much more severe.
China news agency Xinhua reports
that, due to crop damage, a basket of 18 vegetables was 64% more
expensive since last year.

Investors are now concerned that China will have to take stronger
steps to curb inflation. And that would not be good for the global

South Korea raised
interest rates overnight to combat inflation.

Inflation is also exceeding targets in
Brazil. A more
aggressive interest rate hiking campaign is expected there.

Inflation in England is hitting 3.2%. Eurozone
inflation is also running a little hot at 1.9%.

Now, we should be aware that some inflation was the desired result of
easing policies around the world. But we have to also be aware that easy
money policies have to be temporary. And unfortunately, growth has not
picked up to the point where tightening monetary policy can be
accomplished without hampering growth.

And of all the central banks in the world, the
Federal Reserve seems to be in the most difficult position. It’s the only
central bank that’s still easing. Most others are tightening monetary

With no discernable evidence that QE2 can help the
labor market, the Fed has created a scenario where it may have to tighten
monetary policy to fight inflation when growth is still very slow.

How will this all end? It’s tempting to say it will
end badly. But the fact is, there is no way to be sure.

Despite yesterday’s
decline, I’m still watching the retailers ahead of
the holiday shopping season. And oil stocks can always be bought on

The news that China may be tightening in order to
combat inflation sent oil prices down sharply yesterday. Even though
growth in oil demean from
is a key driver for oil prices, any slowing for the
Chinese economy will not have a lasting effect on oil prices.

Please feel free to write me with your questions and comments. I’ll probably
print them in Daily Profit: [email protected]

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