Thursday, December 20, 2007

Inflation Up: Bernanke Will Sit Tight

Much has been said about Bernanke & Co. the past four months. Despite it all, this is the truest test of his Chairmanship to date.

On Friday consumer inflation numbers were released. The CPI jumped 0.8% in November, crushing October's 0.3% rise. It was largest increase since September 2005. The core CPI, excluding volatile food and energy prices, advanced 0.3%, it biggest rise since January. The results passed Wall Street forecasts of a 0.6% headline CPI increase and 0.2% core gain.

Now, IF the Fed is truly in a neutral stance and is not being told what to do by the markets, then they CANNOT cut rates again in January, barring a dramatic deterioration of the economic landscape.

Recent numbers portray an economy that is growing faster than expectation with jobs and output ahead of expectations. That being said inflation now becomes the primary concern for all and it is getting to the point it is a problem.

Energy prices it seem have finally crept into the picture outside of our gas tanks and heating systems. Now that they have, they cannot be ignored.

Should Bernanke opt to cut rates in the face of the current situation is January, all creditability will be lost. It will then be clear he is taking his direction from the markets which ALWAYS want lower rates, whether is is the right thing or not. That being said we will have to update this again as we get closer to decision day but it is unlikely recent numbers are aberrations.

Investors ought to get in the right frame of mind going into the new year...

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