We got some very interesting inflation data yesterday. In the US, the Producer Price Index (PPI) rose 0.4% in October, when expectations were for a 0.8% increase.
But if you strip out energy and food prices, the so-called "Core PPI" actually fell 0.6%. Computer and car prices were cited as the main source of pricing weakness.
We know this weak pricing environment is exactly why the Fed started a new round of Treasury purchases, known as QE2. It's the second time the Fed has engaged in quantitative easing. The goal is to push cash into the system, boost prices and profits and spur hiring. That sounds good, if it could work. The problem, demand is down due to high unemployment and households are still getting debt levels in order. The Fed is pushing on a string. There's not enough demand to pick up the slack. And that sets the stage for the flood of cheap money to be mis-allocated.
In other parts of the world, we are seeing a different inflation picture. In China, consumer prices are up 4.4% year over year. But there are pockets where Chinese inflation is much more severe. China news agency Xinhua reports that, due to crop damage, a basket of 18 vegetables was 64% more expensive since last year. Investors are now concerned that China will have to take stronger steps to curb inflation. And that would not be good for the global economy.
South Korea raised interest rates overnight to combat inflation.
Inflation is also exceeding targets in Brazil. A more aggressive interest rate hiking campaign is expected there.
Inflation in England is hitting 3.2%. Eurozone inflation is also running a little hot at 1.9%.
Now, we should be aware that some inflation was the desired result of easing policies around the world. But we have to also be aware that easy money policies have to be temporary. And unfortunately, growth has not picked up to the point where tightening monetary policy can be accomplished without hampering growth.
And of all the central banks in the world, the Federal Reserve seems to be in the most difficult position. It's the only central bank that's still easing. Most others are tightening monetary policy. With no discernable evidence that QE2 can help the labor market, the Fed has created a scenario where it may have to tighten monetary policy to fight inflation when growth is still very slow.
How will this all end? It's tempting to say it will end badly. But the fact is, there is no way to be sure.
Despite yesterday's decline, I'm still watching the retailers ahead of the holiday shopping season. And oil stocks can always be bought on dips.
The news that China may be tightening in order to combat inflation sent oil prices down sharply yesterday. Even though growth in oil demand from China is a key driver for oil prices, any slowing for the Chinese economy will not have a lasting effect on oil prices.