Don Luskin Says High Inflation Is Coming, Thanks to Bendable Ben Bernanke

I knew a column like this would be coming from Luskin. He minces no words, and it’s tough to argue against his logic:

This week’s lower-than-expected reports of the Producer Price Index and the Consumer Price Index are being treated as an “all clear” signal on inflation.

Never mind that the lower-than-expected PPI was due entirely to an unanticipated drop in the prices of autos and trucks, and for the CPI it was entirely due to a similar effect in apparel. These reports will surely be enough to keep the Fed from raising interest rates at the next FOMC meeting in late September.

Nobody is panicking now, but they will be.

The reason why I know that inflation is going to keep heading higher is because I am a student of history. ….. I know the inflationary signs to look for, and I know the signs to ignore.

One thing I know is that statistical measures of inflation — like the CPI — are very slow to react. They reflect average prices across the whole economy. When there is inflation, many prices don’t adjust right away — such as wages for union workers who are under long-term contracts.

So even though the CPI’s current 4.2% ought to be alarming in and of itself, it actually underestimates the inflation that is currently building, but which has yet to infect the entire price structure of the economy.

That’s why I like to look at instantaneous measures of inflation, things that register price pressures very quickly.

One such measure is the value of the U.S. dollar on foreign-exchange markets. Throughout history, when the dollar falls, it’s a precursor of inflation to come. Right now the dollar has fallen 30% over the last five years. Today it’s almost as low as at any time in the last decade.

Another measure is the price of commodities, especially gold. My historical studies show that gold is very highly correlated with future inflation, as measured by the CPI. At today’s gold price — which has more than doubled from its lows about five years ago — CPI can be expected to start running between 5% and 7%.

And even that’s an optimistic estimate, because in that study I used so-called “core” CPI, which strips out the effects of energy and food prices. Put those back in — especially energy — and you’ve got a panic-inspiring inflation rate.

….. What should be done about today’s inflation threat?

….. All it takes is higher interest rates. The Fed should not have paused its rate-hiking cycle at last week’s FOMC meeting, and it should not pause at the upcoming September meeting.

But the Fed did, and the Fed will. And when more evidence of inflation comes pouring in over the coming months, eventually the Fed will have to make up for lost time with much larger rate hikes.

The bottom line is that, after some tough talk in July, Bendable Ben Bernanke probably blew it in August. It would be nice to see him surprise everyone, including Luskin, with a rate increase in September. Here’s hoping for a few signals to point him in that direction in the meantime.