The alarms bells are screaming; the warning lights are flashing red; US inflation is raging. Last month, the CPI inflation rate hit 5 percent.
In June alone the US CPI jumped up 1.1 percent. If it continues to grow at that rate, within12 months time, the US will have an inflation rate of 14 percent. Let it go at 1.1 percent a month for two years and prices will be up 30 percent. That is the miracle of compounding.
US inflation is now rising at the fastest rate in 26 years. Despite the growing inflationary disaster unfolding America, Bernanke and the Fed are waiting around for some providential deflation to suddenly appear.
Recently, the deflationary argument has rested on the belief that the credit crunch would lead to a slowdown in US monetary growth. In fact, US monetary aggregates are still growing extremely rapidly. For example, M2 is still rising at around 6 percent a year.
Another popular measure, MZM - which includes M2 less small-denomination time deposits plus institutional money - is rising at double digit rates.
Besides, when inflation was rising at more subdued rates, and house prices were the only thing growing at double digit rates, the Fed dismissed monetary growth data as irrelevant. The Fed even stopped publishing M3 data in March 2006, because it wanted to "de-emphasize it".
The simple fact is that ever since the Fed panicked over the health of the US financial system and began cutting rates, inflation has taken off. Interest rates are now negative in real terms. In the past, like for example, the 1970s, negative interest rates meant rapid inflation.
Monetary growth is important. With a lag of about 18 months, monetary growth numbers are rather good predictors of inflation. Despite the credit crunch, US monetary growth is still rising very rapidly. Unless the Fed reverses its insanely low policy rates, US inflation will accelerate.