Who’s Inflating Now?

The smugness must get annoying.

Before Ben Bernanke’s press conference Tuesday there were dozens of blog entries filled with hypothetical questions about Fed policy. Most of the questions had to do with inflation. Typically it challenged the notion of “core” inflation, and noted how oil and crop prices have recently increased, or asked why purchasing power has declined by 60% since 1980. (Here’s a hint: it has to do with math. 3% inflation compounded over 30 years will increase prices 145%.)

But most folks wanted to know what Bernanke is going to do about recent commodity price swings. The unspoken expectation is that higher interest rates might reign in price pressures.

But the best cure for higher prices is higher prices. We’re now seeing that with cotton. Six months ago the papers were a-twitter with concerns that soaring cotton prices could double the price of basic clothes like blue jeans. But a funny thing happened: farmers planted more acreage, consumers slowed their purchases, and inventories are now overstocked. Some observers are talking about a cotton glut, and prices have fallen (yes, fallen) by 20% in the last month.

One month doesn’t make a trend, but it certainly can be considered a correction. Fed policy didn’t make cotton prices rise, and it hasn’t made them fall. The Fed expects that the overall inflationary tendency is 1-2%. With falling housing prices, falling cotton prices, and stable labor costs, that seems reasonable.

The Fed is right to open itself up for questioning periodically. Let’s hope that the market’s myopia doesn’t annoy them into overreacting.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2017-07-17T12:35:05+00:00 May 1st, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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