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Inflation?
I strongly belive inflation is about to ramp up in the next few months and I don't think there is much the Fed can do about it. We simply have "too many dollars chasing too few goods" to borrow a phrase from the often quoted economist Herb Stein. Throw in a few external world events and higher inflation seems inevitable.
Inflation as the US Department of Labor* defines it is "a process of continually rising prices or equivalently, falling value of money." The Fed has certainly injected the economy with liquidity (read print cash) as evidenced by QEII alone, adding $600 Billion in ten months. I believe this printing of cash has caused a falling value of money and has contributed to the historical increase in the cost of raw commodities. Things like cotton, soybeans, oil, corn and gold are priced in the World's reserve currency, the US Dollar. If the US Dollar is worth less then it takes more of them to buy the same hard assets.
Further, it is not lost on the political leaders of emerging market countries like China and Brazil that the high costs of food was a major factor that touched off the unrest in Egypt. Recently China & Brazil are spending some of their Forex reserves to stock up on food commodities thus driving up prices even further, or too many dollars chasing too few goods. To buy said commodities, China, awash in US Dollars is spending funds that were allocated to soaking up new US Treasuries. Once a major buyer of our debt China has been a net seller of Treasuries for the last three months. (Why the Maven is Morose, Barons, 2-28-11, p. 35)
So, add to the falling value of the dollar, the sky-rocketing price of oil (which, was helped along by the Middle East unrest--which was helped along by the falling value of the dollar) and hoarding of stores of food-stuffs by worried politicians and you have a perfect storm for inflation.
In the past the Fed has raised interest rates to dampen inflation. I don't think that works this time. First of all, I don't think the Fed has the stomach to raise interest rates while unemployment is at 9% and secondly, were they to do so it could slow production of the very things the world is buying thus pushing the supply and demand curve even further in the wrong direction.
According to the US Bureau of Labor Statistics January's CPI-U increased 0.4%, not too bad overall. I wonder where it will be for the month of February? Keep an eye out on March 17 at 8:30 am to see how the rising price of oil affected February's CPI--I suspect it will be significantly higher.
Marty
*http://www.bls.gov/cpi/cpifaq.htm#Question_1 | 
