"Baum is one of Russell's Favorites and is very smart and get's it. These policies are very precious metals friendly, and one of these days (you pick the day) the Market will 'Get It'"

David Fuller's view Thanks for this important column by Caroline Baum for Bloomberg: Inflation Lurks as Stealth Tax on Top of Form 1040. I commend it to all subscribers.


Ben Bernanke was appointed to the US Federal Reserve because he was an acknowledged expert on deflation and promised that the Fed would not allow the US to follow Japan's path of the last two decades and counting. So far so good on holding deflation at bay, and the Fed is focussing on the employment half of his dual mandate.

In the economic equivalent of the question: which came first, the chicken or the egg, we are all guessing which comes first: a self-sustaining recovery or inflation? No one knows. All we can be certain of is that Mr Bernanke will be a hero if a recovery worthy of the name comes first, and without the need for further QE steroids. In that event he will gradually raise rates to head off the inflation which is presumably in the pipeline.

If inflation comes first, and many people would correctly say that it already has in terms of most goods and services which we have to pay for, from food to education, then Mr Bernanke's achievements will be more controversial. Currently, inflation is not reflected by US government bond yields, but primarily because the Fed is the main buyer of this debt, as is the BoJ in Japan, the BoE in the UK and now the ECB via the banks which it is supporting.

Meanwhile, the Continuous Commodity Index (Old CRB) (historic, weekly & daily) remains in an overall downward trend, evidenced by the progression of lower rally highs and declining 200-day MA. It is also approaching an important low established in December. That low is significant because it was followed by the best rally since the peak nearly a year ago. The current retreat from 600 has lasted for seven weeks so CCI is somewhat overextended relative to its MA. If it were to encounter good support above its December low, and there is obviously no evidence of this as yet, it would suggest that a basing phase was underway prior to a more significant rally. Conversely, a sustained break beneath last year's low would reaffirm the medium-term downtrend.

I can think of three reasons why CCI is falling: 1) less user demand; 2) increased production of most commodities; 3) less long side speculation and more shorting. I assume it is a combination of all three. Whatever, Mr Bernanke will be pleased with the ranging downward trend because it shows that overall commodity price inflation is currently in retreat, albeit from a very high level. However, since this Index is unweighted, it does not reflect the economic headwind that crude oil prices have provided over the last year. While relieved that inflationary pressures are not worse, Mr Bernanke will be concerned by the slower GDP growth implications of CCI's retreat. It suggests that a steroid (QE) free self-sustaining economic recovery remains elusive.

(See also yesterday's item on "Some consequences of current monetary policy.")