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The New Fall Fashion is Inflation

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Get ready to be hit by some startling inflation data. The data soon to be released by the government will put a dagger through the hearts of those who are predicting a protracted period of deflation. Wall Street and Washington are telling you inflation isn't something we need to be concerned about for years to come. The truth is starting this October the reported Consumer Price Inflation data will become ugly. That is because the year over year comparisons of energy and commodity prices become very unfavorable.

To start off, there is little evidence even now of deflation in the current year's data. Already we find if we annualized the first six months of inflation data in 2009, the rate of CPI is running at a 2.8% annual rate. But the focus has been on the year over year change, which has been very quiescent--negative 1% for May and -1.2% in June. The YOY negative CPI print has been the direct result of plummeting energy and commodity prices.

How important are commodity prices in the CPI calculation you ask? According to the Bureau of Labor Statistics, the relative importance of commodities in the CPI index is 39.556%!
For the immediate future the storm clouds of inflation will not visible to all. The price of oil has been halved from its peak of $147 a barrel last summer to $70. And the Reuters Jeffries CRB Index has fallen from $400 to just over $260 as of today.

Therefore, the inflation data coming out for July will have the benefit of over a 50% decline in the price of oil as compared to last year. And the August data will also enjoy the pleasure of a 35% decline in the CRB Index from a year ago. However if we assume today's prices, come December the CRB Index will be up 26% instead of down 35%. And instead of being down 50%, the price of oil will be up 100% come Christmas.

The soon to be reported surge in inflation will primarily be the result of a continued weakening in the US dollar. Our efforts to ignite the reflation of the housing market have been placed on the back of a depreciating currency. A strengthening dollar and a deflationary environment just can't exist while the monetary base has doubled in the past year and with an 8% increase in M2.

This gives Ben Bernanke reprieve from addressing the weak currency and inflation for the next few meetings-including the one taking place today. But come November, the spotlight on the FOMC meeting will be especially intense and bright. The Fed will either have to decide to defend the dollar or allow inflation (even as reported and acknowledged by the government) to run way above their target level of 2%. The point remains the same however; he must soon provide a real rate of return for savers while at the same time most likely putting a nail in the coffin of this recovery or seek to continue our inflation and debt addictions.

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Michael Pento is the Chief Economist for Delta Global Advisors and a contributor to greenfaucet.com.