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Fed Must Pick Its Poison–Inflation or High Interest Rates

By: Michael Pento

While Bernanke is busy closing his eyes and his mind to everything related to inflation, the Producer Price Index was screaming at him this morning. The PPI for February increased by 1.6% month over month and surged 5.6% year over year. But please allow the Fed to divert your attention to the meaningless core rate, which was up just 0.2% from the January reading. The cost of food increased 3.9% in just one month, the most since November 1974. But apparently, according to the Fed, food is a discretionary luxury and is something that should be overlooked.

It’s simply getting more and more absurd and difficult for the Fed to claim inflation is quiescent. Very soon they will either have to decide to sell 100’s of billions of dollars in bonds and aggressively raise interest rates—thus crushing this nascent recovery—or allow inflation to cause the dollar and the bond market to crater.

Meanwhile, we had a breath of fresh air on the housing front. New home construction rates fell 22.5% in the month of February to a 479k annual rate. While most in the MSM view this as bad news, they once again miss the point. New home construction companies should be building virtually zero homes until the market clears the overhang of existing inventory. Less new construction will help expedite the healing process.

Not only are exogenous natural catastrophes hurting global GDP growth but the global sovereign debt crisis hasn’t gone away either. The Moody’s ratings agency cut Portuguese debt by two notches from A1 to A3 and kept the rating on a negative outlook, suggesting more downgrades may follow. The downgrade is likely to make it even more expensive for Portugal to raise money on the international debt markets. The country’s 10-year cost of borrowing hit a new high of nearly 8% last week.

The global problems haven’t gone away; they have as simply been kicked down the road along with the U.S. recession. Only now the can has morphed into a giant aluminum boulder. The next kick will do a lot more than just stub your toe.

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