Inflation Fight Coming

The Consumer Price Index for All Urban Consumers increased 0.4% in December on a seasonally adjusted basis (Bureau of Labor Statistics)

  • FOR THE YEAR: December’s jump along with November’s 20 bip jump means we saw the index jump by 1.4% over the last 12 months.
  • THE CAUSE: The Gasoline Index, with an 8.4% increase, was responsible for more than 60% of the overall increase

SIDE NOTE: Food also saw a .4% increase for the month of December

Rising food prices have many concerned about the possibility of the dreaded inflation. St. Louis Federal Reserve President James Bullard was not hopeful when asked about that possibility telling Reuters, “The money supply has ‘exploded,’ fiscal deficits are ‘off the charts’ and a hot economy may either already be here or ‘just around the corner.'”

HEREIN LIES THE PROBLEM: If we do see an uptick in the velocity of money; inflation will undoubtedly follow suit.  How do we fight inflation? We raise interest rates to encourage savings which slows consumption and slows down inflation. However, rising interest rates will be a big problem for Washington.  Rising interest rates mean rising borrowing costs which means spending gets more expensive.

Bob Doll, Nuveen Chief Equity Strategist & Senior Portfolio Manager, was on Bloomberg Surveillance Wednesday and was asked about U.S. deficits. He said, “it doesn’t matter, yet. You see, interest rates have fallen faster than the debt has gone up. So interest expense, as a percentage of our economy, has actually gone nowhere and therefore has not been an issue. If we pile up the debt and interest rates start climbing higher then we are going to have a day of reckoning.”

Washington is going to have to decide between more inflation and more debt or less inflation and less spending (You would think that would be an easy decision but we are talking about Washington).  Falling interest rates have allowed us to borrow more while keeping our debt payments about level. However, as Doll mentioned above, the day of reckoning might be sooner than we think. What decision will Washington make?