Tuesday August 8, 2006 - 11:09:50 GMT
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Black Swan Capital - www.blackswantrading.com
Crude: Is it inflationary?
â€śWhat Bernanke's critics miss is there is nothing inconsistent about talking like a hawk on inflation -- that's what central bankers are paid to do -- and holding the federal funds rate steady to allow for the lagged effects of the prior 425 basis points of tightening.
â€śIf the Fed's forecast is wrong and inflation doesn't abate with slower growth, policy makers will raise rates again. In the meantime, by emphasizing the importance of price stability as both an end in itself and as a means of achieving maximum sustainable growth, the Fed hopes to prevent inflation expectations from becoming embedded. (Hey, if policy makers think rising inflation expectations are such a risk, why not talk up deflation as a goal?)
â€śInflation lags the economic cycle. In fact, the consumer price index for services holds the distinction of being one of seven select components of the Index of Lagging Economic Indicators. Why you would use today's inflation to make policy for tomorrow is anybody's guess.â€ť
FX Trading â€“ Crude: Is it inflationary?
We continue to hear the rise in crude prices is â€śinflationary.â€ť But if crude prices feedback directly into inflationâ€”shouldnâ€™t we be seeing inflation â€ś70â€™s styleâ€ť by now? Or is it somewhere â€śat the margin stuffâ€ť where the inflation impact kicks into gear from energy costs? Have we reached that point? Are we seeing inflation driven by rising goods prices as a result of the higher energy prices? If you believe what was suggested in the chart we shared yesterday, from GaveKal, showing China re-export prices falling, itâ€™s tough to make the case for rising final goods prices. The fact that China can continue to absorb rising raw material and energy prices and keep filling WalMart shelves at everyday low prices might anecdotally speak volumes.
For a given pool of money: Rising crude oil prices means consumers spend more on energy and less on other stuff instead; that is not inflationary. It moves money from users to producers. And if we are in a world of tightening liquidityâ€”rising crude prices tend to be a drag on growth.
We are sure Mr. Bernanke understands these relationship and permutations to a degree we could hardly fathomâ€”as do many of our extremely astute readers. Our take is that Mr. B does not see rising crude as an added danger to inflation now that the BOJ, BOE, and ECB are doing the dirty deed AND US growth is decelerating.
After 17 meetings, Ben gazed upon his handiwork and was content. Thus, on the 18th meeting, he rested.
Jack Crooks, Black Swan Capital Black Swan Subscription-based Service
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