While the market will obsess about the hugely flawed PPI, and especially CPI (Consumer Price Index) coming this week, let's focus on a report that is not based on a flawed model (click on the inflation link at the bottom of this post and scroll through and you can see some discussions on why CPI report is an absolute joke)
Today, on the other hand we have a realistic report with numbers that sound reasonable - and it is saying our imported goods cost 11.4% more than they did a year ago. Now that actually jives with what real Americans see every day in their lives. And this is why the Fed is in a box - inflation on one side, an imploding lending system on the other.
Since, in my view, there is very little the Fed can do about inflation near term (it is more a condition of a 'World of Shortages'), the Fed must worry about the credit system. However, without forcing banks to disclose what is in their black boxes, banks will not trust each other, no matter how much liquidity the banks are handed by central banks. They are simply hording this money to shore up their quickly degrading balance sheets.
Much of the 'assets' on their balance sheets are literally disappearing by the month, so they simply take the freshly minted money handed to them and horde it. So creating new money out of thin air only serves to devalue currencies and help prop banks up and save them from their awful decisions. That money is not getting passed on (in large part) through the system. That is the issue here and it's not going to get solved by any easy schemes.
This is why I fear we are going to stagflation - real and persistent inflation not caused by overheated economies, but too few resources spread over too many countries entering the "first world" realm of consumption and industrialization, combined with (in the U.S. and W. Europe) slowing economies. I hope I am wrong on this fact, since it will hurt a lot more in the real economy than the stock market, and will cause severe fear. But at this point in time, looking out one year this seems to be the path we are going. We have many years (in fact decades) of easy credit, and a leveraged financial system - if it even corrects 20% - it is so leveraged through the system it will have effects everywhere.
Anyhow back to that import report
- Driven by a weaker dollar and much higher prices for petroleum and natural gas, import prices surged 2.7% in November, the largest monthly increase in 17 years, the Labor Department reported Wednesday. Even excluding fuels, import prices rose 0.5%. (while a bit alarming any one month report does not make a trend, so I don't get too worked up over this figure)
- Import prices have now risen 11.4% in the past year, the largest gain in the 25-year history of the import price index. (now this is the trend, and the worrisome figure - how the Feds can with a straight face tell us inflation is 2-2.5% when we import almost all our consumption is beyond me)
- The import price index report certainly highlighted the inflationary dangers facing the Fed and the economy.
- Intense competition has limited the ability of firms to pass along 100% of the higher prices they must pay. Profit margins are squeezed instead. (so either the consumer will suffer if these prices are passed along - bad for main street and eventually bad for wall street as demand drops, or the sellers will eat the higher costs - which is bad for wall street immediately as profit margins drop - so it is either pay now or pay later - eventually we all pay for higher prices)
- Prices received by U.S. producers also jumped in November, rising 0.9%, the biggest increase in 12 years. Export prices are up 6.1% in the past year, also the largest yearly gain in 12 years. (worldwide inflation; a world of shortages)
- Prices of agricultural exports rose 1.4%, the sixth straight month of 1%-plus gains. Agricultural export prices are up 23% in the past year, reflecting the weaker dollar and the boom in commodity prices.