Inflation - the next whammee to the slowing economy arrives

The New York Times reports on the rapid increase in inflation during June.

A crucial measure of inflation rose at its fastest rate in 17 years, the government said on Wednesday, just a day after the chairman of the Federal Reserve warned that inflation poses a significant risk to the nation’s economic outlook.

The Consumer Price Index, which measures prices of a batch of common household products, rose 1.1 percent in June, the Labor Department said. That means inflation accelerated at nearly twice the rate in May, when the index grew 0.6 percent.

It was the biggest monthly gain in the closely watched inflation indicator since September 2005.

The increase in June caps a year where inflation has risen to proportions seen by some as threatening the stability of the American economy. In the last 12 months, the price index has risen 5 percent, the biggest year-over-year jump since 1991. Core inflation is up 2.4 percent compared to June 2007. [Snip]

A large part of the increase in the index stemmed from the record high price of crude oil, which has sharply raised gasoline prices. Stripping out food and energy products, the so-called core index rose 0.3 percent last month, slightly more than economists had predicted. Energy prices advanced 6.6 percent, reflecting the surge in gasoline prices.

The Fed has warned about higher inflation for months, although Ben S. Bernanke, the Fed chairman, has repeatedly said the nation does not face the runaway price gains of the 1970s.

But this week’s economic reports speak to the difficult situation faced by policy makers going forward. A measure of retail sales, released on Tuesday, showed that consumer spending has nearly stagnated, a sign that economic growth is slowing. But the Fed cannot lower interest rates without risking more inflation problems ahead.
[Highlighting mine - Editor WTF-o]

So inflation is hitting while the economy is slowing. The fed cannot pump the economy by lowering interest rates without increasing inflation and also causing the dollar to drop more in international markets.

The drop in the dollar has caused some of the run up in crude oil prices, but not by any means all of it. Here is today's report from Kevin Drum.

This week, in a piece called — you guessed it — "Crude Awakening," Business Week claims to have gotten access to a super-secret internal Saudi document with a field-by-field breakdown of estimated Saudi oil production from 2009 through 2013. Its conclusion? 15 million barrels is a pipe dream:

The detailed document, obtained from a person with access to Saudi oil officials, suggests that Saudi Aramco will be limited to sustained production of just 12 million barrels a day in 2010, and will be able to maintain that volume only for short, temporary periods such as emergencies. Then it will scale back to a sustainable production level of about 10.4 million barrels a day, according to the data.

....One dramatic part of the data concerns a site called Ghawar, which has been the kingdom's workhorse field for decades. It shows the field producing 5.4 million barrels a day next year, but the volume then falling off rapidly, to 4.475 million daily barrels in 2013.

The Fed's only cure for inflation is higher interest rates that result in slowing the economy. If Saudi Arabia can no longer act as the swing producer that sets the price for OPEC (which is what the limitation on their production means, then oil prices will continue to rise, with a resulting further wave of inflation through the American economy - and probably the economies of the rest of the industrialized world.

This isn't going to help the already weak banks that Jim Cramer considers threatened:

We all know that Citigroup (NYSE: C) (Cramer's Take), Wachovia (NYSE: WB) (Cramer's Take), Washington Mutual (NYSE: WM) (Cramer's Take) and National City (NYSE: NCC) (Cramer's Take) are in trouble. Bank of America (NYSE: BAC) (Cramer's Take) says it isn't in trouble, but obviously the market doesn't believe management because the stock failed to rally when it said its dividend was safe.

Further bank failures are going to further stress the already stressed American economy.

The next time someone claims all this will be over by 2009, laugh at them.

As for who caused all this - the housing bubble and the credit crunch are all entirely financial mismanagement brought on by deregulation of the financial sector of the economy as a result of the Reagan Revolution and the conservative movement with its strong Libertarian free market element that catered to Wall Street Bankers. That's caused most of the drop in the value of the dollar. It was entirely the fault of conservative policies since Reagan was elected in 1980.

But the rapid increase in price of oil is different. It is the natural effect of running out of a key economic resource. Still, it was known and predictable, even if the exact numbers were not known for sure. Yet in spite of that foreknowledge, no one has prepared for it by encouraging greater efficiency in oil use. The conservatives have fought increasing the CAFE standards tooth and nail for two decades. They have also fought government economic planning, claiming that it meant the government would be choosing economic winners and losers, and that twas a function that should be left to the free market. Unfortunately for that idea, the free market is congenitally incapable of looking past the next quarterly earnings report.

Planning for the far future requires collecting information from a lot of different and widely separated sources and analyzing that data without being too concerned with the results of the cost of data collection on the next quarterly report. Only a monopoly or government can do that, and monopolies charge monopoly-level prices to do it. Government is more efficient at system-wide regulation and long-term planning than private enterprise.

Ignoring the strengths of government is a major reason why the current economic problems are now worse than they should have been.