Inflation Everywhere but in the Mind of the Fed (Michael Pento)

Friday, October 1, 2010
By: Michael Pento

The BEA released some amazing data on Personal Income and Outlays this morning. No, it wasn’t the fact that Personal Spending was up .4% and Income was up .5% for the month of August. It was the data on inflation that caught my eye and, more importantly, the Fed’s reaction to it.

Core PCE increased 1.4% YOY, while the overall inflation rate jumped 1.5% from August 2009. That’s correct--all you deflation propaganda pundits out there listen up--price levels are rising even when using the Fed’s own preferred inflation metric.

But our central bank’s reaction to this data is shocking. Fed policy makers on Sept. 21 moved closer to another round of unconventional monetary easing and said for the first time that inflation is too low. According to the Federal Open Market Committee statement, “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”

This morning Fed Bank of New York President William Dudley said the outlook for U.S. job growth and inflation is “unacceptable” and that the central bank has options to add stimulus without any serious repercussions. “We have tools that can provide additional stimulus at costs that do not appear to be prohibitive,” Dudley, who serves as vice chairman of the Fed’s policy setting Open Market Committee, also said in a speech to business journalists in New York today, “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.” Dudley even went as far as talking about the effects of another $500 billion increase in the Fed’s balance sheet.

So inflation that has risen 1.5% YOY as measured by the Bureau of Economic Analysis isn’t enough for our Federal Reserve. Our dollar, which is plummeting on the FX exchange, apparently isn’t falling fast enough for Mr. Dudley. Oil, gold and most other commodities are soaring this AM, but that doesn’t allay the Fed’s deflation fears.

The Institute of Supply Management Survey of Manufacturing for the month of September fell to 54.4 from 56.3 and the prices paid component soared from 61.5 to 70.5. Evidence of escalating inflation can be found everywhere except in the minds of those who are charged with the protection of our currency’s purchasing power.

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.