Inflation, Inflation, Inflation

The economic news this week has been dominated by inflation concerns. The Federal Reserve has been talking up the inflation factor and investors have reacted by selling bonds and pushing up interest rates. The Consumer Price Index (CPI) for May was up 0.4% for the month and is 5.2% on a year to date basis. The core CPI which excludes food and energy was up 0.3% for the month and 3.1% year to date. The pace of change is building momentum and this is causing an increase in concern at the Federal Reserve. The Fed is not alone in being concerned about inflation pressure the European Central Bank (ECB) raised rates this week and sited inflation as the reason for the increase.

The Federal Reserve Chairman, Ben Bernanke, has been quoted as saying that “Inflation expectations, if they get high enough can create a self-fulfilling prophecy”. The Fed is concerned that the general expectation of future inflation has been increasing over the past few months and that is that sentiment persists then consumers will be more willing to accept higher prices. This willingness to pay higher prices will allow inflation to take hold in a much broader segment of the economy not just in energy and related sectors.

The New Federal reserve Chairman is also concerned about how the world perceives him and in order to make his position as an inflation fighter clear, I would not be surprised to see the Fed move rates by 0.5% at the next meeting June 28-29th. This would signal to the rest of the world that the Bernanke Fed will do what it takes to halt inflation.