Inflation? What Inflation?

Thursday, November 29, 2007 | 07:01 AM

A tale of two headlines:

Inflation Fears Hit Eurozone


Goldman Sees Funds Rate Cut to 3%

Won't someone please explain this to me?

How is it possible that the regions of the world with strong currencies -- like Europe, U.K., Australia, and Canada -- are having inflation problems. And yet at the same time, the nation having a record low currency -- i.e., the United States and our Dollar -- doesn’t seem to either inflationary pressures (At least according to official CPI data). And we seem to have little concern about further currency induced price increases.

Am I the only person who finds this incongruent?

If Goldman Sachs is correct, and the Fed does eventually cut rates to 3% -- what might that mean for various dollar priced commodities like Oil & Gold?

Probably very little -- if (and this is a big IF) we are in the throes of a recession. But what if the Bulls are right, and this is merely a mild mid cycle correction?

A 3% Fed rate could mean Oil at $150 and Gold at $1200.

Excerpts after the jump . . .


Inflation fears hit eurozone
By Ralph Atkins in Frankfurt and Krishna Guha in Washington
FT, November 27 2007 18:02

Goldman Sees Funds Rate Cut to 3%
Greg Ip
WSJ, November 27, 2007, 9:26 am




Goldman Sachs says the Fed will cut the federal funds rate target to 3% by the second quarter of next year from 4.5% now to “forestall recession.”  

That’s down from its previous forecast of 4%. The worsening housing slumped has upped the odds of recession to between 40% and 45%, the firm says in a note to clients today, from 30%. The firm sees the economy growing an annualized 1.5% this quarter and just 1% in each of the first two quarters of next year but to avoid recession thanks to this more aggressive response from the Fed."


"Energy and food prices pushed inflation in Germany this month to the highest level since at least 1995, leading economists to forecast the annual eurozone figure, released today, would reach 3 per cent or above for the first time in more than six years. That would pose a serious challenge to the ECB, which pledges to keep inflation "below but close" to 2 per cent.

Soaring eurozone inflation is threatening fresh difficulties for the European Central Bank as it fights to calm tensions in financial markets that are casting a shadow over economic growth in the 13-country region

The Federal Reserve faces a similar dilemma in the US, where consumer price inflation hit an annual rate of 3.5 per cent last month, and could approach 4 per cent in the coming months, in spite of sharply slowing growth.

The Fed does not have a formal inflation target, and puts more store than the ECB on the lower underlying rate of inflation excluding food and energy. But it is concerned that high overall inflation could unsettle inflation expectations.

Moreover, unlike the ECB, the Fed has to worry about the effects of currency weakness on prices. The Federal Open Market Committee is torn between these inflation dangers and pressure for further rate cuts to deal with mounting risks to growth from the financial markets.

Two hawkish regional Fed presidents on Tuesday underscored their reluctance to cut interest rates at the next policy meeting in December. Charles Evans, Chicago Fed president, said the Fed judged the risks to growth and inflation as roughly balanced at its last meeting and added "my reading of the data since then continues to support this risk assessment". Charles Plosser, Philadelphia Fed president, said the US economy would bounce back and warned that providing insurance on growth through rate cuts "creates its own set of additional risks".

However, analysts close to the Fed believe vice-chairman Don Kohn will use a speech today to pull the US central bank back from its confrontation with the markets over the outlook for the economy and interest rates.

Mr Kohn is expected to acknowledge that the risks to growth have increased due to the relapse in financial markets since the Fed's last meeting, while reiterating that it still takes inflation risks seriously.
US consumer confidence in early November fell to its lowest level since the aftermath of Hurricane Katrina, the Conference Board said on Tuesday, while the S&P Case-Shiller index indicated house prices fell at their fastest rate in more than two decades in the third quarter.

US investors brushed aside this data and pushed the S&P 500 up 1.5 per cent as oil prices fell 3.4 per cent and banks were boosted by a $7.5bn investment in Citigroup by the Abu Dhabi Investment Authority. Bond prices fell, pushing yields higher, after a brisk bond market rally on Monday.

Thursday, November 29, 2007 | 07:01 AM | Permalink | Comments (36) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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Maybe the Euros actually include things that matter in their inflation calculation. Since I don't believe the US gov't inflation stats, I surely don't believe the real GDP figures.

Posted by: Lloyd | Nov 29, 2007 7:37:06 AM

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