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The Global Inflation Trend Is Not Helping The Fed

 June 14, 2011 10:06 AM

Tuesday, June 14, 2011. 9:45 a.m.

The continuing spike in global inflation, in spite of aggressive efforts of central banks for more than a year to bring it under control with rate hikes and monetary tightening, puts pressure on the Fed in sticking with its current low interest rate, easy money policy in the U.S.

That's another reason to expect that, like last year, the Fed will not step in immediately with some version of QE3 to halt the economic slowdown or stock market correction. Last year it waited until the S&P 500 was down 17% and the Nasdaq down 19% before jumping in with QE2. And inflation and other reasons for hesitancy are more substantial now than a year ago.

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For instance, yesterday India reported that its inflation rate was up 9.06% in May, worse even than forecasts. India was already expected to raise interest rates again on Thursday. Yesterday's report practically guarantees the rate hike.

India's stock market has not been happy with the rising inflation or rising interest rates. It topped out in November, and broke not only short and intermediate-term support levels, but has been beneath its long-term 200-day m.a. since January.

In Europe, the U.K. reported yesterday that its inflation rate remained at 4.5% in May, well above its central bank's stated comfort level of 2%.

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It's market hasn't been happy since February, now down for the year and back to its level of late November.

Last night China added to the worsening inflation news. Its central bank raised the reserve requirements for its banks by 0.5%, after it was reported that its inflation rate rose to 5.5% in May. That was its fastest year over year rise in three years, and more troubling, it came after aggressive rate hikes and similar monetary tightening all last year to try to bring inflation under control, and last night's change was the 6th step in monetary tightening so far this year.

Stock markets do hate either rising inflation or rising interest rates. And China's market has also been unhappy since November, with concerns growing that China will have to become so aggressive with interest rate hikes and monetary tightening that it will slow its economy all the way to a hard landing, in recession.  

Fortunately for the Fed, it does not consider the sharply rising cost of food, oil, gasoline, and energy to be inflationary for U.S.

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