Thursday, November 15, 2007

A Headline Development

Fed head Ben Bernanke’s “transparency and openness” speech yesterday placed headline inflation as one of the central bank’s key economic forecasting indicators. This is a first for the Fed. Up until now, they’ve always used core inflation (excluding food and energy) as their key price-target benchmark.

Because of rising energy and food prices, the headline inflation rate has been increasing over the past year. From today’s CPI report, the low inflation point occurred in October 2006 at 1.3 percent. Over the past twelve months, however, this overall rate has increased 3.5 percent.

The Fed’s so-called inflation target is about 2 percent. Therefore, if the Fed is truly watching the headline inflation rate (as I believe Bernanke signaled yesterday) then Wall Street should rule out any easing at the December Fed meeting.

This is especially the case since it appears the Bush administration and the Fed want to stabilize the weak dollar. President Bush seemed to indicate this in a recent television interview.

There may be good reasons to buy stocks on the recent dip, but an easier Fed should not be one of them. By the way, I think Bernanke is right to focus on overall inflation.