CPI News

The CPI reports came out about an hour ago, and as I expected, it was higher than forecasted. It rose .2% as opposed to a .1% increase which was predicted. I would like to dig into this a little bit. Keep in mind that I think the CPI is a joke and completely underestimates inflation by a large amount. It is still the leading indicator of inflation used by the majority of Americans. It is also apparent to remember that core inflation doesn't include energy or food costs.

The consumer prices rose 2.1% since January '06 while core prices rose 2.7% in the same period. Medical costs rose .8% which is the highest gain since August '91. All of these numbers are higher are higher than they were expected, or at least higher than what they said to the public. Most analysts expect a sizable increase in interest rates to combat these interest rates by the end of the year.

This is very interesting, because it really puts the Fed between a rock and a hard place. The last thing they would like to do it raise interest rates. Historically, interest rates are risen when we are experiencing rapid economic growth. It is used to calm down a raging economy. Now, with the U.S. on the verge of 'public' recession, higher interest rates would be disastrous for the economy. (public is in quotes because I already believe that we are in a recession) The Fed has to make the decision between raising interest rates and taking the recession that is coming one way or another, or lower interest rates, postponing the recession, making it worse, and sending inflation through the roof. The sad thing, is that I firmly believe that they will take option two. That will also be when the floor falls out under the dollar. The feds actions/response in the coming months will be very important in regards to the future economic state of this country.

Let's look at gold for a second. Right now, gold is trading at around $680 /oz, up $22 or so. Silver has the same story, its up about $.45 at $14.25 /oz. With the news of the higher than expected CPI, it appears that gold has rocked through its resistance at $670. I expect another resistance point of $686 /oz, this last July's high. After that, it should be smooth sailing to around $740. At $740 /oz there will be another resistance level, and then new highs in and around $850 /oz. Ladies and gentlemen, this is going to be fun to watch. Stay tuned.