US inflation at 17 year high

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The U.S. inflation figures came out and they were worse than expected, pushing the annual inflation rate up to 5.6%. This is the highest inflation rate since 1991. Nevertheless, most economists greeted the rise, fueled by a 30% increase in energy prices with a big yawn.

Witness these comments in the BBC News report of the figures:

U.S. prices rose by 5.6% in the year to July, the fastest inflation rate for more than 17 years, figures show.

The rate of inflation was much greater than economists had predicted, driven higher by the 30% increase in energy prices during the period.

Food costs were 6% higher than a year earlier, the figures showed.

The price rises are squeezing consumers further. Inflation-adjusted average weekly earnings fell by 3.1% in July compared with a year earlier.

Despite the high inflation figure, economists predict the rate will begin to slow from next month as a result of recent falls in the oil price. Oil reached a record high of $147 a barrel in July but has fallen significantly since.

“[Inflation] is certainly above expectations here, but I think we’ve probably seen, for the near-term anyway, the worse of the inflation readings,” said Keith Hembre, chief economist at First American Funds.

Gary Thayer from Wachovia Securities agreed: “If we don’t get an unexpected shock that pushes commodity prices back up, this might be the worst inflation news that we’ll get for a while.”

BBC News, 14 Aug 2008

Yesterday, the UK released equally atrocious figures, but with the Eurozone now in recession, the UK and Japan probably in recession as well, and the housing market flat on its back, Ben Bernanke is in no position to raise interest rates.

Yet, if you look at the numbers here, you can clearly see that inflation has been increasing over the past year. Inflation for the quarter through July increased at a stagflationary 10%. Moreover, it’s unbelievable but true – base rates in the U.S. are 3.6% below the rate of inflation and likely to go down sooner than rise.

What does that tell you about the Fed’s concern about recession? It says the Fed is concerned — even scared to death — that this recession and bank crisis is going to be very, very bad. I share those concerns and I don’t anticipate a rate rise unless the Fed has a death wish.

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