Six Point Eight

From the minutes of the Fed's Jan 30th meeting released today:

"The higher-than-expected rates of overall and core inflation since October, which were driven in part by the steep run-up in oil prices, had caused participants to revise up somewhat their projections for inflation in the near term. The central tendency of participants’ projections for core PCE inflation in 2008 was 2.0 to 2.2 percent, up from the 1.7 to 1.9 percent central tendency in October. However, core inflation was expected to moderate over the next two years, reflecting muted pressures on resources and fairly well-anchored inflation expectations. Overall PCE inflation was projected to decline from its current elevated rate over the coming year, largely reflecting the assumption that energy and food prices would flatten out. Thereafter, overall PCE inflation was projected to move largely in step with core PCE inflation."

Also today the BLS released it's CPI report showing inflation running at 4.3% over the last twelve months. Over the last three months, the all items index increased at a 6.8% annual rate. Yesterday, China reported it's CPI has also increased over the last three months at a 6.8% annual rate. It should be clear now, if it has not been for some time, that resource competition among the world's economies is fierce, and inflation pressures globally, especially in the case of food and energy, are approaching levels where inflation expectations become rather less "well-anchored."

Yesterday, the value of fiat money globally was reduced by 5% against the price of just about any commodity traded on organized markets. Crude breached $100, and items from palladium and platinum, to wheat and gold made all time highs anew. And yet in the foggy corridors of the Fed, where "muted pressures on resources" are "expected" and softer food and energy prices are "assumed" it seems the future course of monetary policy depends on the Fed's ability to pick the top in commodity prices, a decidedly naive and costly strategy.

The Fed is depending on a slowdown in domestic consumption from the over-levered consumer to relieve resource pressure globally and soon, while aggressively lowering rates in a desperate attempt to keep that same consumer's spending habit alive. The contradiction is clear. The question is then how many more six-point-eights can you stand? The chart below says not many.

Bloomberg: Spot Gold