16 04 08 Fed Monkeys
With few exceptions, the Federal Reserve governors have taken the persona of monkeys: speak no evil see no evil hear no evil. Of course the evil here is inflation. And the few who have been brave enough to even raise the topic in their public events are careful to say 'we must be vigilant!' and 'we see it coming down soon!'. We don't have access to LexisNexis to verify but it seems to us that has been the infrequently mentioned party line for over two years.Yesterday brought a shocking revelation (well, the latest installment): inflation is alive and well. The Labor Dept. released the March PPI (producer price index) data and it was a shocker - so much so that most of the 'major' media outlets picked up the story and fretted over the 1.1% headline increase in the cost of finished goods. The Fed crowd of course were quick to say 'food and energy!' and took solace in the 'core' reading of +0.2%. Lost on both groups?
Intermediate goods: +2.3%, core +1.1%Those are month on month changes, not annual.
Crude Goods: +8.0% core +3.5%
This morning saw March CPI up 0.3% while core posted a 0.2% gain, matching market expectations. Consumer prices rose 4% on a year-over-year basis, same as Feb. Core CPI grew 2.4% on an annual basis. Once again, there are those who are pointing to this release as indicating 'inflation is well contained'. Of note, 6 month treasury bills are yielding 1.45%, 2 year notes are 1.85% and 5 year 2.69%. Only 30 year paper trades over the annual inflation rate (based on y/y CPI) at 4.45%.
We ask: How long before the intermediate and crude components of PPI are passed through into CPI? Asked another way, for how long can companies absorb these increases in inputs (by productivity gains we are told) before their margins begin to erode and consequently, earnings?
It was nice to see that former Reaganite Martin Feldstein wrote yesterday in the WSJ that it was time for the Fed to stop cutting rates or risk further fueling commodity inflation while not helping (and probably hurting) the underlying US economy. We here at Rant Street have been saying this for a few years now but better late than never that someone with clout catches on.
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