Rising Inflation Turning Up the Heat on Central Bankers!

A hilarious thing happened earlier this month. The President of the New York Fed, William Dudley, tried to justify the Federal Reserve’s easy money policy.

In a speech before the Queens Chamber of Commerce, he claimed inflation wasn’t a problem, noting as one example that:

“You can buy an iPad2 that costs the same as an iPad1 … you have to look at the prices of all things.”

The response from the crowd? Utter disbelief! One person in the crowd referenced the rampant food inflation we’re seeing by asking Dudley,

“When was the last time, sir, you went grocery shopping?”

Another quipped,

“I can’t eat an iPod!”

Me?

I can’t believe the claptrap the Fed is peddling either! Former Goldman Sachs economists like Dudley and his Ivy League-educated boss Ben Bernanke may say (at least publicly) that inflation is under control. But the rest of us in the Real World know that’s bupkis.

Gas. Food. College. Heck, Diet Coke! It’s all getting more expensive.

More importantly, the OFFICIAL data is now confirming what you and I are seeing every day. That’s turning up the heat on central bankers worldwide — with important investment ramifications for you.

Don’t Look Now, but Inflation
Gauges Are on the Rise!

We get three major inflation reports every month here in the U.S. — one each on import prices, producer prices, and consumer prices. So what did the latest figures show?

* Import prices jumped 1.4 percent in February from January. That easily topped forecasts, and it was the fifth month in a row where prices rose by more than 1 percent. Imports cost 6.9 percent more than they did a year earlier, the fastest inflation rate in nine months. And imported food shot up the most in any month since the government began tracking in 1977!

Last month import prices leaped higher than had been expected.

* Producer prices surged 1.6 percent, the biggest monthly gain since June 2009! Wholesale goods and services are now rising in price at a 5.6 percent year-over-year pace, the most in almost a year. Further up the pipeline, intermediate goods rose in price at the fastest pace since July 2008 while crude goods jumped another 3.4 percent.

* Consumer prices jumped 0.5 percent, the most in 20 months! Price increases at the “core” level are also picking up, rising by two-tenths of a percent for two months in a row. That’s something we haven’t seen since the fall of 2009.

Then earlier this week, we learned that U.K. inflation surged to 4.4 percent in February. That was faster than the 4.2 percent expected by economists, and the worst reading in any month since October 2008. Consumer inflation in the 17-nation euro zone is also picking up. At 2.4 percent in February, it’s now comfortably above the European Central Bank’s 2 percent “limit.”

Market Sands Shifting as
Price Pressures Increase

Look, central bankers can try to stick their heads in the sand for a while when the numbers take a turn for the worse. That’s what U.S. policymakers — and their developed world counterparts in the euro zone and U.K. — were doing for a while.

But our foreign counterparts are showing increasing signs of breaking ranks. That’s leading to speculation the ECB could hike rates as soon as next month, with the U.K. not far behind in July.

Here in the U.S., Bernanke is still (yes, STILL!) dragging his feet. But the yield curve continues to flatten as I predicted several weeks ago. And investors are continuing to bet against him in the interest rate futures market.

So why should this matter to you?

Interest rate hikes will likely push stock prices down.

Well, I wouldn’t be surprised to see risk assets like stocks get hit as slightly tighter monetary conditions get priced in. I also continue to believe the dollar is vulnerable.

I’d use the “relief rally” we’ve seen in the wake of the Japanese quake and nuclear crisis to lighten up on stock market risk. I’d also look to hedge currency risk in my fixed income portfolio using investments such as the iShares S&P/Citigroup 1-3 Year International Treasury Bond Fund (ISHG). Foreign bonds tend to rise in value when the dollar falls because each interest or principal payment remitted in a foreign currency translates into more dollars as it’s repatriated.

Oh, and if a Fed official shows up in YOUR town to talk policy? Feel free to heckle all you want! These guys don’t know what the heck they’re talking about when it comes to inflation.

Until next time,

Mike