By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y. (MarketWatch) — The Federal Reserve’s love affair with easy money must end — the sooner the better.
In the face of overwhelming evidence that inflation has become a clear and present danger, the central bank continues to insist that easy money and low interest rates are de rigueur for today’s economy.
Its rationale is simple: The economy is still struggling, unemployment remains high, and the markets are reeling from a series of global shocks — the latest being Japan’s earthquake, tsunami and nuclear crisis.
If prices were stable, there would be no question that the Fed is on the right course. But prices are not stable: From basic commodities to wholesale right up to retail, prices are jumping.
As a former governor of New York used to say, let’s look at the record.
The Economist magazine’s weekly tabulation shows raw-materials prices are 35% higher than last year at this time, with non-food agricultural products soaring a whopping 76%.
Wholesale prices have risen at a 13% annual rate since November alone. Not surprisingly, the Institute for Supply Management’s measure of prices that companies pay for goods used in the manufacturing process stood at 82 last month — a sign that price pressures are common and severe.
At the retail level, consumer prices have jumped at a 5-1/4% clip over the past three months, after inching up at a more moderate 2% pace in the previous three. This has led many people to conclude that higher inflation is here to stay. Consumers polled by the University of Michigan expect prices to rise 4.6% over the next year.
The markets sniff inflation. The Treasury-TIPS spread is at a multi-year high. ( See last week’s column.) The yield curve is steep, gold is close to a record high, while the dollar has fallen in world financial markets.
Besides today’s inflation numbers, the markets are also looking at the effects of monetary ease.
The Federal Reserve Bank of St. Louis reports that the central bank’s monetary base has soared by a 54% annual rate since early November, an 83% clip since mid-December — and a thumping 152% pace over the last two months!
Adjusted reserves have climbed at an astounding 342% annual rate since mid-January, while both the money supply M2, and the St. Louis Fed’s measure of liquid money, MZM, are both up by a rate of more than 5% over the past 10 months.
Yet the Fed’s mantra seems to be “don’t worry, be happy.” Said Fed chief Ben Bernanke recently, “the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation.”
But any increase in prices is bad news for those whose incomes are not rising commensurately — meaning most of us. Once they are up, prices rarely come down. As I pointed out in my column of Jan. 18, during the past decade the dollar has lost 20% of its buying power; since 1990 the overall loss is nearly 30%!
Central bankers would be aware of this if they shopped regularly like the rest of us, instead of sitting in their ivory towers looking at their iPads.
