Bernanke Sees Inflation…Finally

• keith
• February 19th, 2010

There are plenty a market pundit making noise in the marketplace today that the “core inflation” report was benign. Most of those pundits have been US Dollar bears, interest rate doves, and need a reason to support their misplaced view that the Fed wouldn’t tighten this year. So take their narrative fallacy for what it’s worth.

Having been a buy-sider for most of my career, like you, I get the joke. Sell side strategists usually take a point of view and look for data points to support that view. They do not have a platform to change their “views” dynamically. Markets obviously move dynamically. So does your P&L.

Since the US Government has changed the calculation of inflation 9 times since 1996, we do not subscribe to the groupthink associated with taking the government’s word for it. Headline inflation doesn’t have the government sponsored adjustments like “core inflation” does. So we use headline.

Headline inflation is now running up +2.6% year-over-year growth as of this January report, and I think it will remain elevated well beyond any estimate coming out of Washington until at least August (that’s when we lap the low in the chart below of -2.1%).

Bernanke is tightening because he finally sees the inflation threat implied in this chart. It’s as plainly obvious as reported deflation was when the pundits were chasing the rabbit of the next Great Depression.

Keith

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