Wednesday, July 16, 2008

Inflation: The Worst in 26 Years

We are being hit from all fronts. The economy is a basket case with no sign it will improve. This is worse than a recession. No sector of the economy seems to be doing well. We are in a crisis.

Consumer prices shot up in June at the fastest pace in 26 years with two-thirds of the surge blamed on soaring energy prices.

The Labor Department reported Wednesday that consumer prices jumped 1.1 percent last month, much worse than had been expected. Energy prices rocketed upward by 6.6 percent, reflecting big gains for gasoline, home heating oil and natural gas.

The big rise in prices cut deeply into consumers' earning power with average weekly wages, after adjusting for inflation, dropping by 0.9 percent in June, the biggest monthly decline since 1984.

You need more proof. Listen to what the Fed chief has to say.
Caught between risky cross currents of plodding growth and rising inflation, Fed policymakers are facing "significant challenges" as they try to find a way to right the economy, Bernanke told the Senate Banking Committee on Tuesday.

The Fed can't afford to lower rates again to shore things up because it will aggravate inflation. On the other hand, boosting rates to fend off higher prices would deal a setback to the fragile economy and the already crippled housing market.

Against that background, most economists predict Bernanke and his colleagues will leave rates alone when it meets next on Aug. 5.

It's difficult to chart a course when uncertainty abounds, Bernanke said.

Over the rest of this year, the economy will grow "appreciably below its trend rate" mostly because of continued weakness in housing markets, high energy prices and tight credit conditions.

At the same time, inflation has remained high and "seems likely to move temporarily higher in the near term," Bernanke warned lawmakers.

Consumer prices are expected to climb higher in June, while industrial production probably will be flat — fresh signs of the twin problems plaguing the country. Those economic reports will be released on Wednesday.

On Tuesday, the Labor Department reported wholesale prices, driven by skyrocketing gas and food costs, rose 9.2 percent in the 12 months ending June — the fastest in a quarter-century.

"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining housing prices, a softening labor market and rising prices of oil, food and other commodities," Bernanke said Tuesday.

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