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Precious Metals & Inflation
June 2, 2008

Are stocks at all profitable considering the impact of true inflation?


"The truth about core inflation."

"A vivid example of spin is the response to inflation. With gasoline prices now around $4 a gallon and pointed higher, the cost of food levitating to dauntingly high levels and a passel of other items large and small spiraling upward, inflation is alive and kicking hard -- as anyone who fills up his car or wanders into a supermarket knows. But, much like those Krishna kids who used to shuffle the streets decked out in robes and moaning their incantations, a surprising number of economists in the Street keep uttering their mantra, 'There is no inflation.'

By way of proof, they cite a concoction deliberately created by the Federal Reserve under Arthur Burns, seeking to mollify political pressures -- and refined several times subsequently -- that eliminated food and energy, supposedly because they were too volatile. Which is how some misbegotten monstrosity called 'core inflation' was born.

It's also why the core-ists sound so cheerful about current inflation, which might range as high as 11% if it were measured by the more stringent standards in effect before Burns puffed his pipe and ordained the end of food and energy as components of the inflation yardstick. By the core-ists benign reckoning, the present rate is somewhere around 2% and all must be well on the inflation front.

Or so it seems to that misguided bunch. But a hot-off-the-presses paper by the research department of the Federal Reserve Bank of Philadelphia finds that, pure and simple, "core inflation is not necessarily the best predictor of total inflation" and, contrary to the conviction of Burns and his spiritual heirs, "food and energy prices are not the most volatile components of inflation."

Which, we feel, is deserving of a polite 'Wow!'  These conclusions are backed up by pretty exhaustive and somewhat exhausting research findings, adorned by algebraic formulas and a proper smattering of graphs and tables.

The core-ists, alas, may just have to change their tune and get real.

THE STOCK MARKET UNDENIABLY still has a pulse. But to judge by the way it bounces, this cat is fast using up just about all of its nine lives.

The only question, it seems to us, is how long it takes those happy souls eagerly taking the plunge to wake up to the fact that this is a market kept aloft pretty much on hope, always a sorry substitute for something tangible like an economy with legs. And this economy, despite the sputtering stimulus of a tax rebate and the gobs of dough the Fed is tossing around, is headed for an extended stay in rehab.

Once you eliminate the impact of higher prices on the numbers, the poor thing is barely keeping its head above water."

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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