It's likely that few people were happy to see last Friday's
Consumer Price Index (CPI) report, but no one should have been more
miserable about it than Ben Bernanke.
Inflation may be the most direct threat to the Federal Reserve's
quantitative easing program, and last Friday's report signals that
inflation could be coming back with a vengeance.
Oil fuels a possible inflation revival
The
Bureau of Labor Statistics reported
that the CPI rose by 0.6 percent in August. That's the highest
single-month inflation number in more than three years, and a rate
of inflation that would project to more than 7 percent over the
course of a year.
To temper that a little bit, it should be noted that monthly
inflation numbers are subject to some pretty severe swings. There
is no reason to believe that inflation will continue to rise at a 7
percent annual rate in the months to come. Still, this flare-up of
inflation is especially troubling because it was fueled primarily
by gasoline prices, which rose by 9 percent in a single month. This
is not only a steep increase in its own right, but one that could
creep into the prices of many other things that require oil and gas
in their production and transportation.
It was a bad month for inflation, but that's not to say a new
trend has taken hold. Due to low inflation in prior months,
year-over-year inflation through August was just 1.7 percent. More
recently, oil prices have begun to fall, which could take the
pressure off inflation.
Somewhere, though, one senses Ben Bernanke's fingers are firmly
crossed.
Not good for QE3
Why Bernanke in particular? Just the day before the inflation
report, the Federal Reserve announced that it was
expanding its monetary stimulus program
with a third round of quantitative easing. In making the
announcement, the Fed noted that a quiet inflation environment
allowed for such a move.
Now, it seems, inflation may not be so quiet. Inflation would
not only destroy the stimulative impact of QE3 by discouraging
lenders from making loans at low rates, but it might also force the
Fed to reverse course and raise interest rates to head off
inflation.
A saver's perspective
If Ben Bernanke was unhappy to see inflation rear its ugly head,
depositors in savings accounts, money market accounts and other
bank products should give him company in his misery. Yes, it could
be argued that higher inflation would force
higher interest rates
, but that would be an empty victory because at best, higher prices
would negate the improvement in rates. More likely, savings and
money market rates would be slow to catch up with inflation,
leaving depositors trailing badly behind.
Thus, you might find yourself joining Bernanke in spirit by
anxiously awaiting the next inflation report, which will come out
in the middle of October. If inflation is here to stay, it would
add an ugly new wrinkle to an already troubled economy.