Inflation or Higher Rates

When considering inflation, you can't just look at the figures in front of your face. You have to consider inflation expectations, and the Fed realizes this and moves accordingly. Greenspan has done a great job of keeping core inflation relatively low. Bernanke will come in and continue with his "inflation targeting" policy. My report on Ben S. Bernanke and inflation targeting should be available on RW Wentworth website in the coming weeks.

The reason why core PCE has been relatively low is a result of the Fed’s continued bias towards increasing fed funds rate and also from cheap goods coming from foreign countries. On the other hand, some companies have been biting the bullet because of high energy prices. They’re probably having a tough time raising prices on their products due to competition. So, they turn to operating efficiencies, but seriously, how much more do you think technology will be their answer. These companies will probably come together to do something to raise prices.

As mentioned, one thing that has kept prices down is the cheap goods from abroad - like China. Domestic producer concerns are probably why the senators have been so aggressive in pushing China to appreciate their currency. Last resort will be a tariff on these goods, which would directly increase prices of the items in the PCE and other inflationary measures.

Sure inflation isn’t here yet, but there are pressures out there. The FOMC will continue to raise rates to keep inflation stable. So it’s like take your pick: higher inflation or higher short term rates.