Inflation Won't Be Invisible for Long, Folks

One school of thought holds that when commodity prices are rising, businesses suck it up and consumers never feel it. Too bad that's wrong. Also: Are bonds for suckers?

Regular readers know my view that inflation lies ahead, but last week The Wall Street Journal took pains to let us know why we needn't worry. (Read "Consumers not likely to feel commodity costs rise.")

Is there a bubble in bonds?

"The Federal Reserve's decisions to keep interest rates near zero and to flood the financial system with credit are sparking fears of an eventual outbreak of inflation. But inside the Fed, an influential band of policymakers is fretting over the opposite: that the already-low rate of inflation is slowing further."

Janet Yellen, one Fed head who champions that view, is quoted as follows: "Underlying inflation pressures are already very low and trending downward." (A wsj.com subscription is required to view the content cited here.) Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=230212f1-261c-412a-a57f-cd8bf6b69d25,ee623d63-d265-4473-bd53-058d5c82e4b7,045d7d1e-a8a3-45e4-ba8d-e6ece92722b2,e00800b2-9e5e-415e-9acd-b8fcfcd53f3b,aa8271f6-8289-42c9-83a6-9c4d4e589feb", "player.fr": "iv2_en-us_money_article_Investing-contrarianchronicles-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=230212f1-261c-412a-a57f-cd8bf6b69d25,ee623d63-d265-4473-bd53-058d5c82e4b7,045d7d1e-a8a3-45e4-ba8d-e6ece92722b2,e00800b2-9e5e-415e-9acd-b8fcfcd53f3b,aa8271f6-8289-42c9-83a6-9c4d4e589feb;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');Notwithstanding the Fed's occasional "hawkish" rhetoric, this is what it thinks, in my opinion. Federal Reserve Chairman Ben Bernanke is committed to one goal: not repeating the "mistake" made in 1937-38 -- when, in his opinion, the central bank tightened rates too soon and sent America back into depression. (He doesn't really understand the root cause of the Great Depression, but that isn't this week's topic.)

I believe that at some point Bernanke will feel compelled to try to stop the rise in interest rates caused by the government's out-of-control budget deficit, riding to the rescue by pumping out cash in some version of quantitative easing. Inflation we'll never see? Hardly Back to that inflation-is-tame story: While The Journal meant to calm folks' fears, it did note that the prices of many commodities are heading higher. But lest that prove unnerving, the paper said that "little if any of this will filter through to the consumer in the form of higher prices for things such as cars and dishwashers."

The Journal's line of reasoning? We aren't going to see higher prices because the raw-materials component is so small and demand is so weak. There's just too much excess capacity -- or "slack," as the newspaper calls it -- so any price increases will just be swallowed by businesses.

Some businesses may be willing to absorb a portion of the price hikes for a little while, but that won't last long. In fact, we're starting to see this in far too many areas. A reader of my daily Market Rap column on my Web site (subscription required) -- a longtime businessman in the hardwood industry -- noted that prices have leapt dramatically in the past year. One reason for prices being pushed higher is that so many mills have gone out of business. So, when government money printing (which can spur demand) meets industries that have been hammered, price increases do result.

I don't know when inflation will show up in the Consumer Price Index, because the government's data are so badly skewed by statistical manipulation, via hedonics and substitution. (See my Feb. 9, 2004, column: "How the government manufactures low inflation.") But an increase in inflation is coming our way. I think you can take that to the bank.

Continued: Are Treasurys for losers?More from MSN Money

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And now, the great health care bailout

10 big lessons from the meltdown

What really broke the banks

Should the Fed be abolished?

 1 | 2 | next >

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I believe that at some point Bernanke will feel compelled to try to stop the rise in interest rates caused by the government's out-of-control budget deficit, riding to the rescue by pumping out cash in some version of quantitative easing. Inflation we'll never see? Hardly Back to that inflation-is-tame story: While The Journal meant to calm folks' fears, it did note that the prices of many commodities are heading higher. But lest that prove unnerving, the paper said that "little if any of this will filter through to the consumer in the form of higher prices for things such as cars and dishwashers."

The Journal's line of reasoning? We aren't going to see higher prices because the raw-materials component is so small and demand is so weak. There's just too much excess capacity -- or "slack," as the newspaper calls it -- so any price increases will just be swallowed by businesses.

Some businesses may be willing to absorb a portion of the price hikes for a little while, but that won't last long. In fact, we're starting to see this in far too many areas. A reader of my daily Market Rap column on my Web site (subscription required) -- a longtime businessman in the hardwood industry -- noted that prices have leapt dramatically in the past year. One reason for prices being pushed higher is that so many mills have gone out of business. So, when government money printing (which can spur demand) meets industries that have been hammered, price increases do result.

I don't know when inflation will show up in the Consumer Price Index, because the government's data are so badly skewed by statistical manipulation, via hedonics and substitution. (See my Feb. 9, 2004, column: "How the government manufactures low inflation.") But an increase in inflation is coming our way. I think you can take that to the bank.

Continued: Are Treasurys for losers?More from MSN Money

 1 | 2 | next >

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