Wednesday, February 20, 2008

Running Hot, Hot, Hot

The government released inflation data today showing U.S. consumer prices rose across the board in January.

U.S. consumer prices rose a seasonally adjusted 0.4% last month. Excluding food and energy prices, the core consumer price index rose 0.3% in January, the biggest gain since June 2006.

December inflation numbers were also revised upward to 0.4%.

On a year-over-year basis, inflation was running at 4.3% in January. Energy, food, clothing housing, hotel, medical, transportation and drug prices all rose substantially last month. Food prices rose the most in nearly a year.

Given that fourth quarter GDP was 0.6%, the January job numbers were negative, the service sector contracted last month and many economists fear the U.S. economy either teeters on recession or has already fallen into one, the high inflation numbers ought to be cause for concern.

The Federal Reserve keeps trying to jump start the economy, heal sick credit markets and help the housing market by lowering interest rates (they lowered the Fed benchmark rate by 1.25% in one week's time in January), but even as they continue to lower the benchmark interest rate, mortgage rates for most borrowers continue to rise and fall-out from problems in the credit markets continue to spread (here's one example.)

Nonetheless the Fed is expected to lower the benchmark interest rate another half point next month to 2.5% even as oil hit $100 a barrel yesterday, food prices are at or exceeding all-time highs, gold is near an all-time high, and platinum hit a record (all inflationary signs.) Just wait until the panic rate cuts the Fed made earlier this year filter completely through the economy for some really scary inflation numbers.

And yet, as Barry at The Big Picture blogged this morning, the cheerleaders on Wall Street are still calling for Helicopter Ben Bernanke to cut rates back to the 1% Uncle Alan Greenspan had them at for so long back earlier this decade and create some more bubbles to save us from the wreckage of the Greenspan-created housing bubble.

I even heard some shill on CNBC say it might be time to take the interest rate down to 0.5% (as it is in Japan) or even 0% to jump start the economy and save the U.S. from a very scary recession.

Yeah, that will be good for price pressure containment.

You know, given that the U.S. consumer has been living way above his/her means and putting the tab on credit cards or home refis for the last half-decade or more and given that the U.S. government has fought two wars on credit ($800 billion and counting) while cutting taxes and increasing overall spending, you'd have to think that maybe the country is in for a tough economic time for awhile.

It might even be good to have a bit of tough time economically so we can clean up some of the wreckage from the more irrational exuberance of the housing bubble and the other excesses of the Bush years and get back to operating on more practical ground.

Heck, it might even be a good idea to start telling people shopping is NOT their patriotic duty and saving a little bit each month is a healthy alternative to living on credit and from pay check to pay check.

But of course we're not going to do that. Instead, the Federal Reserve, undoubtedly pressured by politicians in Washington uncomfortable with an election-year recession, is throwing caution to the wind and creating a stagflationary environment like we haven't seen since the late 70's/ early 80's.

And as Cunning Realist notes all the time over at his blog, the current crop of politicians are counting on the Fed moves to stave off economic collapse just long enough for another crop of politicians to come into office and take the blame for the mess.

Kinda like how Ford and Carter were blamed for problems that originated during the Johnson and Nixon administrations.

In any case, just how bad are things going to get? Well, Nouriel Roubini sets out the worst case scenario in this Martin Wolf piece from the Financial Times.

I hope Roubini is wrong about that, but if you turn on the business channels these days, you can hear some of the panic about the future from even people who used to seem like "permabulls" (check out this Ron Insana piece at Huffington Post for some of that.)
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