Relief in the
US as CPI exceeds forecast but
equities failed to plunge. Bond yields were up 10 basis points and it seems
inflation fears are now entrenched and allowed for. There are no guarantees but
perhaps yesterday’s equity rally in Asia may
have been a sign that the worst is over.

The core consumer
price index, which excludes food and fuel, rose by 0.3% in May, slightly
above the 0.2% expected by most analysts. Including food and fuel the
CPI increased by 0.4%. This puts the three-month annual rate at 3.8%.

Whilst the
higher-than-expected inflation figures failed to send the markets into the
predicted tailspin, traders remain uncertain of Fed Chairman Ben Bernanke.
According to the The Economist,
“traders have not yet decided whether Mr Bernanke is a hawk or a dove. This
uncertainty has spread across the Atlantic and
the Pacific, as investors worry that the Fed will take action against inflation
that might slow the American economy. The latter has been responsible for much
growth across the rest of the globe. Nor are inflationary worries limited to
America. Europe’s central bankers are
also fretting, and even Japan is starting to think about raising interest rates,
which have long been at zero.”

Ray Block asks the important question – why, when inflation has only risen a little in
recent months, “have the economists at Morgan Stanley and other Wall Street
firms forecast that the Federal Reserve will not only increase the federal funds
rate in their meeting on June 28-29 from 5% to 5.25%, but that
there is a “good chance” of a further increase to 5.50% in August?

“The answer…is
that Fed officials are determined to ensure that the financial markets have more
accurate expectations of the likely future course of Fed interest rate policy,
and more effective communication of that policy.”

Henry Thornton.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey