http://www.news.com.au/adelaidenow/story/0,22606,24033320-5005962,00.html
US inflation hits 26-year high
On a 12-month basis, CPI was up 5.0 per cent in June, the hottest annual inflation level since May 1991. Core CPI was 2.4 per cent higher than in June 2007, the strongest rate since March.
The report underscored Federal Reserve concerns about rising inflation and sluggish growth -- the noxious combination of stagflation -- as the economy battles fierce headwinds from financial turmoil and the worst housing crisis in decades.
"Inflation is currently too high,'' Fed chairman Ben Bernanke said in a second day of testimony to Congress, speaking after the CPI data release.
"And it's a top priority of the Federal Reserve to run a policy that's going to bring inflation to an acceptable level consistent with price stability as we go forward,'' he told the House of Representatives in his second day of semiannual testimony to Congress.
Mr Bernanke, however, emphasized that ``the enormous jumps in oil prices and other commodity prices are to some extent at least due to real factors out of the control of the Federal Reserve.''
"It's the global supply and demand conditions which are affecting those particular things to the most significant extent,'' he added, a day after delivering a grim report to the Senate.
The Fed chief's remarks indicated the central bank, which has slashed its key interest rate to 2.0 per cent in recent months, would be hard-pressed to loosen monetary policy in the face of accelerating inflation.
"Inflation is the bind that ties the Fed and it is quite tight right now,'' said Joel Naroff of Naroff Economic Advisors.
Bank of America economist Peter Kretzmer said that in light of Bernanke's testimony Tuesday indicating both downside risks to the economy and upside risks to inflation, "this morning's extreme spike in headline inflation and unfavorable core reading are particularly unwelcome.''
"The CPI report underlines the current stagflation, and points to the variety of difficulties faced by the Fed,'' he added.
Kenneth Beauchemin, US economist at Global Insight, said the inflation trend combined with the current growth outlook signals the Fed "will take a pass on rate hikes until 2009. Indeed, the remote chance for financial disaster in the coming months keeps a rate cut on the table.''
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In my simplistic view, it all comes down to the price of oil and whether it will continue to rise or begins to plateau.
In the US a drop in oil prices will see a drop in inflation, allowing monetary policy to loosen and housing and shares to recover.
In Australia we are on the verge of an artificial recession, but if oil prices stabilise we could see interest rates come off up to 1% in 12 months as inflation stabilises and strong commodity prices maintain our exports/imports.
If oil prices continue to rise, then who knows how the Australian government will react, they have prevented inflation snowballing by tightening the economy but if they tighten it any more then we are going to see a severe recession, would they prefer that severe recession and controlled inflation or would they prefer increasing inflation and a soft landing.
