Inflation on My Mind

I've got inflation on my mind, not to mention eating up my savings. After today's Producer Price Index (PPI) release, last week's CPI report, recent warnings from Federal Reserve governors and ECB officials, and a slew of negative news flow out of Europe, the world seems to have finally awoken to the warnings of Wall Street Greek's authors, Kaminis and Ferguson.

Yours truly started talking long ago about the dynamic differences between past seasonal and supply driven fluctuation of food and energy prices, versus today's all too different secular drivers. "The Greek's" Steven Ferguson, a brilliant economist we're proud to have enlisted within our ranks, has discussed the dangers of Bernanke's free flowing monetary and fiscal policies. I also told you that the economy might soon experience an "economic fishtail" due to the aggressive and reactionary actions of our Federal Reserve and the influence of tight global supply/demand dynamics on food, energy and other resources. Furthermore, we argue that inflation might undo the hard work of the Fed, and send the economy sliding off the other side of the road as Bernanke overcompensates for economic deceleration.

Central Bankers Sound Alarm Now

Finally, the Federal Reserve has joined the ECB in sounding the trumpets of alarm. That's a bad sign folks. When fed governors join Treasury Secretary Paulson and soon the President in abandoning their economic cheerleading, which is designed to fool you all into believing everything is okay so you don't panic and fall into a self-fulfilling prophecy of recession/possibly depression, then something is up... For the administration to protect its rears so clearly, inflation is obviously about to roar its ugly head in the near term. Remember, it was not too long ago that Ben Bernanke had declared inflation a nonstarter, saying that economic deceleration would naturally lead to easing prices. So what's changed now Bennie baby?

Producer Price Index (PPI)

This morning, the Producer Price Index was reported for the month of May. Core PPI, you know that fictional character that assumes food and energy prices don't really matter, rose just 0.2%, in other words everything is hunky dory... BUT, headline producer prices, those inclusive of the items you spend most of your weekly check on, rose an extreme 1.4% over last month. Of course, energy prices skyrocketed in May, and we had already warned you that this month's report would be much different than last month's milder news.

Here's the big problem. Even though producer prices take some time to work there way through to the consumer level, and in the past have often never found their way there at all, we see too much anecdotal evidence to the contrary this time around. From Kimberly-Clark (NYSE: KMB) to Dow Chemical (NYSE: DOW), from United Airlines (Nasdaq: UAUA) to J.M. Smucker (NYSE: SJM), companies far and wide are raising prices. So, expect future CPI price measurement to show inflation is out of Bernanke's control.

While wage inflation pressure is easing some, since we see manufacturing firms like Ford (NYSE: F) and General Motors (NYSE: GM) making serious strides to consolidate costs, more generally, across America's still heavily-employed labor force, wages have continued rising.

In Europe, and in the U.K., where incidentally inflation was reported at 3.3% today, labor unions are significantly more aggressive. Expect Jean-Claude Trichet's worst nightmare to play out. Companies will individually succumb to the pressure of their workers in the socialist republic dominated nations of Europe. Thus, inflation will become unanchored in the U.S. and embedded in Europe, in our opinion, and the great economic leaders of our day should find the greatest challenge men in their positions have seen in decades.

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