There are two schools of thought existing today in respect to where prices for goods are headed.

There is the group that believes the U.S. is following the same path as Japan in the 1990s and is headed to a decade of deflation. Then there’s the second group that believes that rapid inflation is more likely. I’m in the second group, and I’m getting some confirmation.

Yesterday, the U.S. Labor Department reported that the core producer price index (often referred to as the wholesale costs) rose 0.4% in July—twice the rate economists had forecast. In a nutshell, companies are paying more for their goods, and I believe those added costs will eventually be passed on to consumers.

It’s already happening in the U.K. Inflation in the U.K. accelerated at an annual rate of 4.4% in July—well above the Bank of England’s “acceptable” 3.0% level.

Inflation will accelerate and persist in America for two reasons:

Firstly, the printing of money at the Federal Reserve since 2008 has been unprecedented. The number of dollars in circulation—the money supply—has increased dramatically over the past two years. History has shown that the more fiat money a country issues, the less it’s eventually worth. We only need to look at countries like Argentina and Mexico to see classic examples of inflation and currency devaluation.

Secondly, the Federal Reserve and the government, I believe, will fight tooth and nail against deflation. If deflation starts to rear its ugly head, the government will just spend more money and the Fed will just print more money.

We experienced the unpleasantness of rapid inflation in the early 1980s. Fed Chairman Paul Volcker put an end to that inflation with record-high interest rates. History, minus the individual characters, could play out again. Only, this time, to add fuel to the fire, we have the unprecedented U.S. debt crisis. Is it any wonder the price of gold continues to rise unabated? Gold stocks will only move higher from here, as inflation returns to America.

Michael’s Personal Notes:

Could the second largest economy in Europe be catching the sovereign debt bug?

France bond yields spiked last week, as rumors surfaced that the country was about to do “an American” and lose its Triple-A credit rating.

What’s the fuss? Economic growth in France fell to zero in the second quarter of this year. In the first quarter of 2011, France’s gross domestic product (GDP) grew at an annualized rate of four percent.

Global Economic Analysis: Personally, I believe that the French government, which is very social in nature, has made a greater effort at reducing government spending. Austerity measures, which have not yet been introduced in America, have been passed in France. Some people might laugh at the idea of increasing the minimum retirement age from 60 to 62, but at least something was done.

If we look at straight debt and GDP, France’s national debt to GDP is 84.5% (Source: France’s National Institute of Statistics and Economic Studies). Our debt to GDP is much higher in the U.S., surpassing 100%.

I’m more positive on France than other analysts. It falls far behind Greece, Portugal, Spain and Italy on the “concern” list. I wouldn’t bet against the country. But I would bet that it will one day get tired of helping Germany carry the remainder of the weak euro currency members. It’s the euro that could be short-lived.

Where the Market Stands; Where it’s Headed:

If we look at the Dow Jones Industrial Average, it’s not down much for the year, a paltry 1.5%. Add in the Dow Jones’ rising dividend yield and the general stock market is not far from breakeven for 2011.

In fact, stocks are doing better this summer than they did last summer. By the end of August of 2010, stocks were down five percent for the year. For the calendar year 2010, stocks gained 10%.

Please, don’t get me wrong. The upside potential for stocks is limited. The easy money in this stock market has been made by the contrarian investors who had the courage to jump into stocks in the spring of 2009. Phase three for the bear market (the worst phase) still hasn’t even started. What I am saying is that stocks, at this present moment, are more attractive as an investment than other vehicles, primarily bonds.

What He Said:

“Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi, in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Tags: bear market, deflation, euro, GDP, global economic analysis, gold stocks, inflation, interest rates, Market Veiw, real estate market, stock market, U.S. debt crisis, U.S. Labor Department