Market Commentary

Inflation Fears

We have been commenting on inflation for months as the Federal Reserve continues to increase the overnight interest rate it charges banks on money they borrow. The Fed has avoided using the excuse for raising rates because they are abnormally low, and are instead focusing on inflation as their reasoning. This is not wrong, as there are inflation pressures slowly building in the system, though it is well contained thus far.

This week the report on June’s PPI and CPI was released. These are basic inflation bench marks. At the Producer Price Level the number rose .3% after rising .5% the month before and at the Consumer Price Level it rose .1%. So for us consumers we have seen inflation rise to an annual rate of 2.9%, the highest level in six years and up 1% from last year. However, wage inflation has yet to go up being flat over the last year.

Inflation is not a destructive force in an economy if it is low or rising slowly, and without wage inflation a cycle of ever increasing prices and wages cannot take hold. Slow inflation is actually considered healthy for an economy. Deflation is a much harder construct to fight.

The problem is that the Federal Reserve has, in the past, consistently been wrong in increasing rates to long and far thus actually being an active cause of recessions. Maybe they should take a deep breath and slow the pace of increasing rates. However, that is not likely to happen.

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