The Inflaton

OK, I'm not talking about the string theory scalar here, but about the forces pushing up prices in the US. Daniel Gross says that its already here, but the Fed just won't admit it.

Imagine that a cardiologist told you that aside from the irregular heartbeat, the stratospheric cholesterol count, and a little blockage in your aorta, your core heart functions are just fine. That's precisely what the government's cardiologist—Ben Bernanke, chairman of the Federal Reserve—has just done. The central bank is supposed to make sure the economy grows fast enough to create jobs and make everybody richer, but not so fast that it produces inflation, which makes everybody poorer. "Readings on core inflation have improved modestly this year," the Federal Open Market Committee said in justifying its 50-basis-point interest-rate cut last month, while conceding that "some inflation risks remain."

Catch that bit about "core inflation"? That's Fedspeak for: Inflation is under control, unless you look at the costs of things that are going up. The core rate excludes the prices of food and energy, which can be volatile from month to month. Factor them in, and inflation is about as moderate as Newt Gingrich. In the first eight months of 2007, the consumer price index—the main gauge of inflation—rose at a 3.7 percent annual rate. That's more than 50 percent higher than the mild 2.3 percent core rate. The prices of energy and food are soaring, at 12.7 percent and 5.6 percent annual rates, respectively, and have been doing so for years. As a result, the CPI—including food and energy—has risen 12.6 percent since July 2003, for a compound rate of about 3 percent.

Pessimists, like yours truly, have predicted this forever. The only plausible way to get out from under a huge deficit (if you are too badly governed to control it), is to inflate your way out. Gross is pointing out the signs that that process has begun.

The Fed, I suspect, doesn't believe that it's really inflation until wages start climbing.

In any case, its hard for me to believe that the world will continue to lend us money cheap forever, without some evidence that we can pay it back - but I could be wrong.