It's always fun reading the CPI releases. Even though I think the government numbers are bogus, the comments uttered by so-called analysts are fabulously entertaining. Beyond the entertainment value, they provide insight into the collective mind of Mr. Market. My favorite quote from today's releases came from Joel Naroff, chief economist at Naroff Economic Advisors. He said, "Energy is a killer, but if you don't use it, you're not seeing a whole lot of inflation." Well, I'm sure the homeless guy that tucks himself into a shop doorway on Fifth Avenue is relieved that he is not seeing inflation, given that he doesn't have an electric bill or automobile. For the rest of us, however, inflation is a reality.
Apart from Mr. Naroff's keen insight, Mr. Market seems to be finally realizing that oil price matters. For the passed few months, the CPI numbers have been met with jubilation, as the core CPI showed diminutive price increases. The positive reactions were no more than a reflection of a psychosis in which traders were focusing on what they wanted to see. Today, after several months of core CPI being greatly overshadowed by total CPI, people are getting worried. Imagine what would happen if a broader base of people came to realize that true inflation numbers are closer to a 6-7% than the 3.5% number the government is making up.
As direct proof that oil price matters, Wal-Mart reported earnings today and guided expectations lower for their full year. The excuse? Rising oil prices have crimped their customers' collective wallets. But of course, energy doesn't matter. It's not "core," right? I mean, it only affects people who drive cars, consume energy, and buy items made with plastics.
Gold and silver rose moderately today with the metals recapturing the $450 and $7 levels, respectively. Whether the rise had anything to do with today's inflation news is indeterminate. However, I did catch a bullish point of interest for the metals and the housing bears. BusinessWeek's current cover story reads: "China & India: What You Need To Know Now." The story discusses the shift of economic power from West to East and is chock full of graphs in elaborating detail about the rise of their economies. BusinessWeek is infamous for blasting its readers with details of important secular shifts right about the time the story is ending.
If BusinessWeek's propensity for bad timing is to stay intact, the Chinese and Indian economies must be about to hit a brick wall. Problems with their economies, particularly China's, would directly affect the U.S. economy. China would no longer be able to soak up our Treasuries at a rampant pace. Such a development would contribute to higher long rates and further crimp the housing party. On the flipside, industrial commodity prices would fall, possibly relieving some of the upward pressure on oil prices. If oil prices were temporarily tamed, inflation pressures would ease, and the Fed would have the cards on their side for rate cuts (it wouldn't necessarily be the prudent thing for them to do, but the Fed isn't bothered by such things as prudence).