Encountering Inflation and What it Means for Bernanke

April 1, 2008

I took this picture in upstate NY at a Mobil Gas Station this weekend. If you look closely, you will see that the $3.79 gallon price is taped on top of a previous price of $3.49 per gallon. According to the Gas Station Attendant, prices were just increased in the past few weeks.

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Also note the words “Limit of 2 Per Customer.”

If you have similar photos, please send them to me!

Since February 2007, milk prices have increased 26 percent. Rice prices are skyrocketing and could increase as much as 55 percent this year according to the World Bank. The price of retail gasoline also hit a new high of $3.29 a gallon after rising 3.1 cents over the last week. Inflation is roaring its ugly head, leaving Fed Chairman Bernanke in a tough spot ahead of tomorrow’s testimony.

Ben Big Ben will be testifying before the Joint Economic Committee and I expect him to come under fire from the politicians who’s constituencies are suffering from rising prices and a deteriorating labor and housing market. Will Bernanke tell us that growth still matters far more than inflation, ignoring the consequences of aggressive monetary easing or will he tell the markets that balancing inflation with growth is the Fed’s top priority going forward? Bernanke please tell us you have a Plan B.

Be careful, because if Bernanke opts for the latter, it could bring the odds for a 25bp rate cut at the end of this month to 100%. A focus on inflation will be perceived by the currency market as very positive for the US dollar. The futures market is currently pricing in a 72 percent of a 25bp rate cut compared to a 28 percent chance for a 50bp cut.

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