Inflation And Deflation

Inflation And Deflation

U.S. inflation heated up a bit in December and sent a wave of delirium through markets, including gold. The euphoria was short lived, however, when analysts reassessed all of 2013 and found that, in fact, inflation rose for those 12 months only 1.5%, scarcely enough to keep the American economy from deflating.

What is worse is that while inflation went up even that modest amount, wages rose only 0,2%, which certainly doesn't bode well for those hankering for inflation to drive gold. 

In other news, the Federal Reserve Bank of Philadelphia said that its manufacturing index improved to 9.4 in January from 6.4 in December. Analysts had expected a reading of 8.6. 

Both those news stories resulted in a modestly lower dollar, which, as most of us know, results in a modestly higher price in the precious metals markets. 

Today marked Ben Bernanke's last public appearance as Fed Chairman. He spoke at the Brookings Institute. The Huffington Post said this about his comments:

"Bernanke said the central bank was aware of potential threats to financial market stability from its massive bond holdings and is monitoring markets very closely to spot any signs of trouble. He said this threat was the one "we have spent the most time thinking about and trying to make sure that we can address" should the need arise.

"'Inflation is just not really a significant risk' from the bond purchases, Bernanke said."

As if to underscore his thoughts, The New York Federal Reserve bought a net $14.3 billion agency mortgage-backed securities in the week ended Jan. 15 under its combined asset purchase and monthly prepayment reinvestment programs. It is going to buy another 18 billion next week. So, the NY Fed, which is the agency for the QE3 purchases we have talking about since Adam, is right on target for 75 billion in asset purchases this month, as promised at the last FOMC.

 "We're running the risk of being content with inflation running consistently below our target. That's inappropriate," said Narayana Kocherlakota, of the Minneapolis Fed, who votes on FOMC policy this year, in an interview with the Financial Times. "Right now we're sitting with an outlook for inflation that even by 2016 is not getting back to 2 per cent."

He said the pledge made in the December meeting of low rates "well past" that point is not sufficient.

"The problem with what's in the statement right now is its going to become increasingly less useful once we fall below 6.5 per cent," said Mr. Kocherlakota. Rather than lower the 6.5 per cent threshold, he said the Fed could bring in new guidance about how it will behave until unemployment hits 5.5 per cent, perhaps with a tighter get out clause on inflation.

"We would say we intend to keep the Fed funds rate extraordinarily low in that interval between 6.5 and 5.5 per cent as long as the medium-term outlook for inflation stays sufficiently close to 2 per cent," he said. "I definitely feel it is important to be numerical about it. Words are always subject, I think, to multiple interpretations."

Meanwhile, we have the presidents of the Philadelphia and Dallas banks saying we ought to taper faster or end QE3 altogether.

Let the battle be joined.