The Fed Is Playing A Dangerous Game With Inflation

March 13, 2014

In the last few months, something major has begun.

That something is inflation.

Regardless of what the CPI inflation measure tells you, the core items that affect most consumers’ pockets are healthcare, housing (rental or home prices), and food.

All of these are rising in price.

Take a stroll down the food aisles at the grocery store…Turkey has risen 34% year over year from its January 2013 price. Boneless chicken breasts are up 11%. Grapefruits are up 13%. Strawberries are up 39%. Spaghetti and macaronic is up 8.4%.

As far as housing goes, prices are beginning to move sharply upwards. The homeowners equivalent rent index rose 2.5% from its January 2013 levels. This is a sharper increase from the 2% year over year changes of 2011 and 2012.

Healthcare costs are rising sharply as well.

And yet, despite this, the Fed believes that inflation is too low.

Fed optimistic on growth, wary of bubbles

Yellen and her supporters are optimistic, but believe the economy has a long way to go

New Fed Chairwoman Janet Yellen and her core supporters on the Fed’s policy committee “are optimistic the economy is on the mend, but believe it has a long way to go,” said Jim Glassman, economist at J.P. Morgan Chase.

This core majority on the Fed don’t think the unemployment rate is telling the whole story on the economy.

They see inflation as running too low, signaling “the economy is not there,” Glassman said.

Fed’s Evans Is Willing to Risk Higher Inflation to Boost Hiring

Federal Reserve Bank of Chicago President Charles Evans said Friday the central bank should be willing to allow inflation to go over its 2% target if that will help the economy get back on track more quickly.

“We need to repeatedly state clearly that our 2% objective is not a ceiling for inflation,” Mr. Evans said in the text of a speech.

The Fed is playing a very dangerous game here.

It was way behind the curve on deflation and economic weakness going into the crash of 2008. Today, it continues to worry about deflation when the clear signs show that inflation is already on the rise.

As anyone who remembers the 1970s can tell you, once inflation hits, it has a bad tendency to become a REAL problem before the Fed acts.

Investors should take note now. Inflation began to appear in early 2014. Given that the Fed is proclaiming that inflation is too low, it’s only going to get worse.

Be warned!


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Best Regards

Phoenix Capital Research

Graham Summers is Chief Market Strategist for Phoenix Capital Research, an independent investment research firm based in the Washington DC-metro area with clients in 56 countries around the world.

Graham’s clients include over 20,000 retail investors as well as strategists at some of the largest financial institutions in the world (Morgan Stanley, Merrill Lynch, Royal Bank of Scotland, UBS, and Raymond James to name a few). His views on business and investing has been featured in RollingStone magazine, The New York Post, CNN Money, Crain’s New York Business, the National Review, Thomson Reuters, the Glenn Beck Show and more.

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