Led by gasoline, prices rise, but Fed still has room to keep gold-bullish policies rolling
"U.S. consumer prices rose a seasonally adjusted 0.5% in June to mark the biggest increase since February, as the cost of gasoline, housing, medical care, clothing and food all rose,"MarketWatch reported, citing the Labor Department's latest Consumer Price Index on Tuesday. "The energy price index shot up 3.4%, spurred by a 6.3% gain in gasoline. Food prices rose 0.2%."Gold initially fell on the CPI report. Why? The increase in the core U.S. consumer price index "suggests that U.S. economy will meet both these conditions for an early withdrawal from QE," said Chintan Karnani, a bullion analyst in New Delhi.
Gold rebounds from lows
However, gold rebounded to finish the day up, above $1,390, as some analysts interpreted the CPI number as low enough to maintain Fed stimulus. "This is probably going to be a little bit comforting for some of the folks at the Fed who are worried about lower inflation," said RBS Securities economist Omair Sharif. "Inflation's still very subdued, still very well contained."
"For the Fed, the steady deceleration in core inflation pressure should continue to create a favorable backdrop for their ultra-accommodative policies," Millan Mulraine of TD Securities told The Wall Street Journal.
Too much inflation or too much deflation?
Caroline Baum of Bloomberg also sees more room to print money. "Today's report on June consumer prices, with its gasoline-driven increase of 0.5 percent, may allay the immediate concerns about falling inflation, but it's unlikely to alter the underlying theme: Four years after the end of the recession, U.S. inflation is still slowing, the Federal Reserve's money-printing operations notwithstanding. Some policy makers say the Fed is being too cavalier about disinflation."
In contrast, Alan Ruskin of Deutsche Bank said the report should "counter arguments that there is a material deflation risk."
Meanwhile, another fan of Fed money printing is Matthew Yglesias of Slate, who wrote: "Generally speaking when unemployment is high and the inflation rate is below the level you consider consistent with your long-term price stability goals what you ought to be talking about is how much looser should monetary policy be. Maybe a lot looser."
True inflation is grossly understated for political purposes
Zero Hedge, however, torpedoed the notion that inflation is low, given that prices are rising for a host of basic necessities: "For those who don't eat or use energy: feel free to stop reading now -- your inflation came in just as expected, at 0.2% up from May, and 1.6% higher compared to a year ago. However, those unlucky few who are forced to eat, use and A/C and/or commute, your inflation just saw its biggest monthly hedonically adjusted jump (don't forget the deflationary impact of that 80 inch LCD TV you have zero intention of buying), or 0.5%, since February's 0.7% and well above the 0.3% expected."
The reason that everyday prices are slamming the consumer is that the methodology of measuring inflation has been reconfigured since the 1980s, as John Williams of Shadow Government Statistics notes. "CPI no longer measures the cost of maintaining a constant standard of living" nor "full inflation for out-of-pocket expenditures," Williams argues. Why? "With the misused cover of academic theory, politicians forced significant underreporting of official inflation, so as to cut annual cost-of-living adjustments to Social Security, etc. ... Understated inflation used in estimating inflation-adjusted growth has created the illusion of recovery in reported GDP."
"Low inflation is not good for the economy"Despite the massaged figures, Ben Bernanke is using the Fed's 2% inflation target (not to mention employment figures that overstate the progress of the economy even though part-time jobs are largely replacing full-time work) as a guidepost by which to continue stimulus. "We will not raise interest rates until -- at least until unemployment hits 6.5 percent, as long as inflation is well-behaved -- again, I think as I've said before, that that 6.5 percent is a threshold, not a trigger," he said last week before the NBER in Boston. "We are all very much committed to defending our inflation target from below as well as from above. Low inflation -- I know -- I know, everyone -- it's hard to explain to your uncle, I know -- (laughter) -- but low inflation is not good for the economy because very low inflation increases the risks of deflation, which can cause an economy to stagnate."
"We expect inflation to come back up," he said. "But if that's not the case, I think we have to say that that would be a good reason to remain accommodative and to try to achieve that objective."
Hedge against inflationary risks with gold
The problem with Bernanke trying to jigger the economy is that the Fed -- a notoriously poor forecaster -- risks stoking inflationary forces that metastasize out of control. That's what inflation hawk and former Fed chief Paul Volcker said in May.
He warned against "yielding to the notion that a little inflation right now is a good a thing, a good thing to release animal spirits and to pep up investment. The implicit assumption behind that siren call must be that the inflation rate can be manipulated to reach economic objectives. Up today, maybe a little more tomorrow and then pulled back on command. Good luck in that. All experience demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse."
Investors should take Volcker's warning seriously and make sure their portfolios have an allocation to gold and silver in case inflation spirals out of control from the Fed's unprecedented money printing, which will see its balance sheet approach $4 trillion by year-end. If and when monetary velocity picks up, this flood of liquidity will gut the dollar's purchasing power. Be prepared with tangible assets.
Monitor what Bernanke says, then watch what he does
Bernanke's testimony before Congress on Wednesday and Thursday will be key to fathoming the Fed's future direction. In the meantime, the CPI number "remains ambiguous, as low inflation is dangerous and would suggest the Fed could act to avoid deflation, while at the same time rising inflation gives Chairman Bernanke more arguments to begin tapering this year," noted Agustin Fontevecchia at Forbes.
"Deflation would require a stronger response from the Fed, meaning rising inflation that remains below their 2% target gives Bernanke & Co. more arguments to taper QE sooner rather than later.
Yet, inflation remains extremely low, having gone through two months of deflation during March and April, and barely rising 0.1% in May before the June jump. At the same time, the gains were a consequence of rising gasoline prices, which act as a tax on consumers. This, in turn, could limit consumption and therefore hurt the economy as businesses slow. ... Bernanke has danced around the issue, first suggesting tapering is closer than expected, then backtracking and highlighting economic weakness. Bernanke, it seems, will keep the market guessing until the last second."
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