Inflation’s Back Already?

Could inflation be back already?

Yesterday, we told you about the latest PPI reading. If you recall, producer inflation popped 1.8% in June, twice as much as Wall Street was expecting and the biggest monthly gain since late 2007.

Today, it’s the same story for you and us lowly American consumers. The CPI rose 0.7% in June, says the Labor Department, also higher than expected.

Factor in CPI and PPI data from the last few months and we’re left to wonder were rumors of inflation’s death greatly exaggerated?

This, to me, is important,” says Addison Wiggin, our executive publisher, “because if inflation is already under way, how is Bernanke going to sop up the excess money in the system, as he claims he’s going to be able to do? This is the question of our time.”

Of course, it’s easy to spin this story in the other direction. On an annual basis, consumer prices are down 1.4%, the biggest fall since January 1950. Music to Ben Bernanke’s ears, we’re sure. But since we’re looking back to 1950, we’d be remiss not to share this historic chart. Betting against American inflation has been a fool’s errand for a long, long time:

The bet

“The market clearly is not worried about inflation right now,” says Chris Mayer. “That is the only way to explain 10-year Treasury yields of 3.5%. The deflationist view is the one that prevails. This view, which makes some compelling and elegant arguments, maintains that the credit losses far surpass the monetary and fiscal stimulus. All those trillions in destroyed debt, plus the yanking of credit from consumers and businesses, overwhelm new money creation.

“So, this reasoning goes, the greater risk is that asset prices continue to fall. This is the classic debt-deflation point of view. The theory seems to fit the facts of what we are seeing in the marketplace right now.

“I don’t dismiss these arguments easily — and there is more to it than what I’ve given you here. I’ve spent some time going over the arguments of some of deflation’s most persuasive and sophisticated advocates: money manager Van Hoisington, economist David Rosenberg and others.

“Still, I think the endgame is for inflation — which is when paper currencies buy less. Given the choice of holding U.S. dollars or real assets (such as gold or iron ore or land), I’ll take real assets.”