17-Year-High Cost-of-Living Surge Worries Bernanke, Too

After the sharp decline of the US dollar yesterday, traders have been taking profit on their dollar short positions today, spurring an upward retracement against major currencies such as the Euro and Swiss franc. Today we got more indications of the discomfort experienced by Americans when it comes to their spending power. The latest government-released inflation data showed that US consumer prices rose by the biggest amount (on a monthly basis) since 2005, increasing 1.1% in June, following a 0.6% rise in the prior month. The majority had only expected a 0.7% gain. No thanks to the soaring price of crude oil, this 1.1% increase in the cost of goods and services in the US is almost double the inflation recorded in May. Compared to a year ago, prices have actually increased by 5%, the most since May 1991, more than the 4.5% increase expected.

These glaring numbers are cementing the widespread inflation woes in the US, which are largely caused by the 90% increase in the price of oil in the past year. Gasoline in the US averages $4 a gallon and is on the rise. If you are postponing or planning to have a shorter summer drive holiday, then you aren’t alone, for many others are feeling crimped in their pockets too.

Another Complication For The Fed

The higher cost of living is one of the concerns faced by the Fed, but are they going to do anything about it? It will be very very difficult for the Fed to raise interest rates in the near future as that would put pressure on already troubled companies like Freddie Mac (FRE) and Fannie Mae (FNM), which would be further squeezed by rising borrowing costs and rising mortgage defaults. Yesterday, although Bernanke said that inflation “seems likely to move temporarily higher in the near term”, he said that “helping the financial markets return to more normal functioning will continue to be a top priority.”

Apparently, Bernanke has two opposing “top priorities”. In Bernanke’s second-day testimony to the Senate today, Bernanke said that inflation is currently too high and lowering inflation is top priority. With these two “top priorities”, the Fed is between a wall and a hard place. Helicopter Ben will need his full 007 gear for this one, but can he pull it off?

Dollar Recovers As Oil Tumbles

Today the US dollar is likely to consolidate its previous day’s losses against other currencies on the better-than-expected industrial production data and on a decline of crude oil to below $133 a barrel after latest data showed US crude inventories were up. US industrial production rose 0.5% in June versus 0.1% gain expected, after falling 0.2% in May.

EUR/USD is now heading toward the low end of 1.5800s, and if the pair drops below 1.5800, it could next target 1.5750-60. USD/CHF is close to erasing all of its losses from yesterday. Nearest resistance is around 1.0220-50. Nearest support around 1.0010.

Economic Calendar For Thursday:

Swiss ZEW survey 0900 GMT

US housing starts, initial jobless claims 1230 GMT

US Philly Fed 1400 GMT

Comments

[whidbey]

You seem to miss the point: The FRE/FRN debauch is in itself the crack in the national bankruptcy dike. If things are carried as out threatened with the GSEs we can be sure that a blank check has been issued and will be used. This means inflation beyond comprehension as the money is spent to both secure the current under-capitalization of the GSE, but also to further the goals of Congress in spreading the wealth (or inflation as it were) to all. The stunt will be done in the name of recovering the housing market and relieving the pressure on home owners living in houses they can not afford. It is worse much worse than you have said, the inmates are "running the bank" at the asylum.

[ozzy43]

Well of course - how could it be otherwise? In order to fulfill the financial promises the politicians have made to the retiring boomers, government has only one choice: inflate the supply of dollars so they can pay up, and we're seeing this occur before our eyes. Thus, the *letter* of those promises will be kept - if not the spirit, as the money will not buy the amounts of goods and services those retiring boomers thought it would. Get used to seeing the faces of seniors when you eat at McDonalds or order a pizza. They're gonna need to make ends meet. And it's always easy to find scapegoats to blame for the government's mess. Perhaps those evil speculators (who don't seem to have much lobbying clout in DC)...

[John Egan]

I sure hope I get at least one Social Security check and that I die before my share of the National Debt bill arrives in the mail. That figure was stated as $455,000.00 for every man, woman, child and other in the USA today.

Thx jegan ;-)

[JohnB]

US National Debt Clock:
www.brillig.com/debt_c.../
It's "only" $31k for every man, woman, and child.
But since many Americans have no resources to pay, the real share for those who pay most of the taxes must be over $100k.