As of late, I’ve been expressing my concern about inflation, how I believe our overly generous monetary policies of the past two years and other factors would give rise to sudden and unexpected inflation in America. Inflation, as you know, is already a big problem in many countries.

A week ago today, the U.S. Labor Department reported that consumer prices rose in April by 3.2% from April 2010—the highest year-over-year increase since October 2008. In the U.K., inflation jumped to 4.5% in April. Even core inflation in the U.K. is out of control, presently running at the fastest pace in 14 years—3.7%.

The blessing in the U.S., many believe, is the stock market. If things pan out as I predict, and the stock market starts moving lower after the current bear-market rally ends, the falling stock market will join the housing market in placing deflationary pressure on prices. Or will it?

If your investments (your stock portfolio) are down sharply, do you feel like spending money? Of course not; your mood is ruined, your wallet tightened.

If the Dow Jones Industrial Average makes a run at its March 2009 low of 6,440 (I know, I’m the only market commentator out there that believes it will), consumer demand will drop, and companies will need to drop the prices of their goods and services. This is all deflationary.

But unlike the last time the Dow Jones Industrials visited 6,440, the money will not be running to U.S. Treasuries this time. No, money will actually be running away from the greenback.

You see, the U.S. has piled on far too much debt in its effort to get us out of the last credit crisis. It does not have the financial resources to deal with another severe financial crisis—except printing even more dollars at an even more accelerated rate—the most inflationary act a government can take.

Michael’s Personal Notes:

According to a survey released yesterday by Trulia Inc. and RealtyTrac Inc., the majority of American homeowners and renters do not expect the housing market to recover until 2014.

They are wrong.

Housing will not recover, and by that I mean prices will not stabilize, excess inventory will not be removed from the market and a healthy housing market will not return until late in this decade.

After a 25- to 30-year down cycle in interest rates, we are headed back the other way now. In 1981, a 30-year fixed mortgage carried an interest rate of 15.8%. Today, that same mortgage has an interest rate of 4.79%.

Inflation, too many dollars in the system, out-of-control government debt, a weakening greenback—these factors will all come together to push interest rates back up. And if there is one thing I’ve learned in about 30 years of real-estate investing, real-estate prices decline when interest rates rise.

Where the Market Stands; Where it’s Headed:

After coming down three days in a row and shedding some three hundred points, the Dow Jones Industrial Average came back to life Wednesday, with the index now up 8.5% for 2011.

Patience, my dear friend, patience! Yes, this bear-market rally is getting old. It will eventually end. But bear markets end with a bang. And we’re simply not there yet. With stock advisors turning bearish, and with so many of them expecting a correction, the bear needs to lure more investors back into the market before taking its final bow.

Sure, upside is limited. But it’s still a bear market rally. Enjoy the gains while they last.

What He Said:

“For the economy the message from retail stocks is quite clear: Consumers spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008.