SPECIAL REPORT: INFLATION HITS 17 YEAR HIGH

SPECIAL REPORT: INFLATION HITS 17 YEAR HIGH

Despite the Federal Reserve’s prediction that called for inflation to moderate (as written in their last statement a few weeks ago), inflation continued upwards today with July CPI moving up 0.8% and 0.3% if you strip out food and energy. The year over year headline inflation number is now 5.6%. This is the highest year over year inflation has been since 1991.

Using the attached link to CNBC, readers should watch the video (if you have 7 minutes) and listen to Rick Santelli and Steve Leisman’s possible solution to speeding up the housing recovery. Almost everyone agrees that having banks write off the estimated $1 to $2 trillion in bad mortgages is the cure to the financing woes, but the banks are hesitant to do so. Why? Because, they can borrow from the Federal Reserve at a 2.25% rate (the discount rate, the Fed Funds rate which is 2% is for interbank lending) and try to hold onto their bad debts with the Fed financing.

By raising the discount rate and holding the Fed Funds rate, the Fed can incentivize banks to accelerate their write-offs as opposed to borrow cheap money from the Fed. In addition to this, increasing the discount rate has lighter implications on the money supply and overall interest rates in the economy. Banks may be incentivized to increase lending to each other via interbank lending, but I do not believe this will have an impact on our economy.

The compounded three month annualized rate of inflation went from 7.9% (which was a number I used in a previous blog) to 10.6%. This means that if inflation were to remain on the same growth trend for nine months, headline inflation will be 10.6% by late spring!! I do not believe that inflation will get that high (yet), but I believe the 7.9% headline number is in reach within the next six months.

Please watch the video if you get an opportunity.
http://www.cnbc.com/id/26195377