Friday, February 25, 2011

Bernanke and Inflation

For those who think I criticize Ben Bernanke too much in this blog, read this article.

Does the Fed Chair ever buy gas, shop for groceries, or check commodity prices in the newspaper?

I have been warning about inflation in my newsletter and this blog for years.  Well, it's here and it's only to get seriously worse, especially for people on a fixed income (like retirees) and investors of all types.

Do a news search for "inflation" and you will see virtually the entire world warning about what's coming.

Mr. Bernanke's own Fed Presidents see inflation.

The ECB sees inflation.

The commodity markets see inflation.

The World Bank is warning about inflation, especially with respect to food prices.

Everyone from Bullwinkle, Boris, and Natasha sees inflation, except, of course, Mr. Bernanke.  Read his testimony before the House Budget Committee just two weeks ago.

Here is his prepared statement to the committee.

These are Mr. Bernanke's words:
On the inflation front, we have recently seen increases in some highly visible prices, notably for gasoline. Indeed, prices of many industrial and agricultural commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable. Over the 12 months ending in December, prices for all the goods and services consumed by households (as measured by the price index for personal consumption expenditures) increased by only 1.2 percent, down from 2.4 percent over the prior 12 months. To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed. Core inflation was only 0.7 percent in 2010, compared with around 2-1/2 percent in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.7 percent last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy.
So, after we factor out precisely the two items that are rising the fastest in price, food and energy, the two essential items people buy and use everyday and the foundation of the U.S. economy, prices are stable.

(This would be like someone saying "Except for the fact that my wife sleeps with the mailman, her boss, and the next door neighbor she's completely faithful to me and our marriage."

And, of course, "longer term inflation expectations have remained stable."

The gold market doesn't agree with Mr. Bernanke.  Today, gold investors are in the middle of a rally that is the strongest for six months.

What more can I say?  Res ipsa loquitor, Mr. Muckle.