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Tuesday, May 20, 2008

Mixed News on Inflation

The economy produced mixed though troubling news on inflation.

US inflation at the wholesale level rose slower than expected in April, but core inflation, which strips out volatile food and energy prices, rose twice as fast as expected and hit its fastest annual pace in more than 16 years, the Labor Department said.

The department's Producer Price Index, which measures inflation pressures before they reach the consumer, rose 0.2 pct in April following a 1.1 increase in March. That's slower than the 0.4 pct rise expected by economists polled by Thomson's IFR Markets.

However core inflation rose 0.4 pct for the month, twice as fast as the March increase.

This is the sort of number only economists and financial professionals get excited about. The wholesale inflation level is a measure of the overall inflation of the economy. The core inflation removes food and gas, two highly volatile commodities, and measures everything else. Removing food and oil inflation rose greater than expected and at a level that puts inflation at near 5% yearly.

Wholesale inflation rose just .2% for the month of April but it also rose 1.1% for the month of March.

I have been saying for months that the Fed's aggressive action in lowering interest rates will likely spin the economy into an inflationary period. The nightmare scenario will be a period of stagflation where the economy is weakening at the same time that we have high inflation.

Monthly inflation figures should always be taken with a grain of salt. Thus, this is a number that needs to be looked at very closely for the next several months for signs of a pattern. If we continue to see core inflation above .3%, we maybe headed straight for a period of high inflation. If that is the case, this economy is in for serious trouble. If we begin to experience inflation at the same time that we are weakening then all bets are off.

Everything from housing, to small business, to nearly every industry will be affected. There will be nothing that will be able to lead us out of the wilderness. This number must be tracked closely.

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