The Surprising Inflation Numbers?

Catching analysts by surprise yesterday, the U.S. government released figures that show core consumer prices rose an unexpectedly high 0.3% in March–50% more than analysts had expected. Core inflation numbers exclude the volatile food and energy segments. Hence, the core inflation rate of 0.3% released yesterday doesn’t take into consideration the recent spike in gas prices.

Was it really a surprise? Maybe to analysts, but not to precious metal buffs like me.

I’m a strong believer in watching the market for an indication of what lies ahead for the economy. Gold and other precious metals are rising for a reason. And while I’ve often written that I believe gold is rising in price because foreigners are losing faith in the U.S. dollar, the rising price of gold is also telling us that inflation is alive and well.

If we extrapolate the core inflation number in March, inflation is running at under 4% a year. We both know that prices in general are rising much faster than 4% annually. Aside from goods that are being imported from China, not much else is falling in price in these. I believe the real inflation rate is much higher because of the way the government accounts for shelter in its numbers.

I think we can safely say, according to the government’s own figures, inflation is rising between 3% to 5% per year. The Federal Reserve has a policy to raise interest rates when inflation gets too high (so as to not repeat the early 1980s economic mess) and to lower rates when inflation is too low (to fend off possible deflation).

Bonds got whacked again yesterday because the higher the inflation rate, the higher interest rates will go and stay. My bet is that new Fed chief Bernanke is as concerned with inflation as Greenspan was. I wouldn’t be a buyer of long-term bonds yet because the short 90 and 180 day U.S. T-bills offer such an attractive yield themselves.

Unless other economic numbers come out to the contrary, I’m expecting two more rate hikes from the Fed. Not good for stocks, not good for real estate, but good for investors sitting with cash looking for conservative, guaranteed returns in their retirement funds.