Signs of Inflation Rising in the US
There are worrisome signs, like the proverbial cloud no bigger than a man's hand that inflationary forces, if left unchecked, could work their way into the US economy. I do not believe the Federal Reserve will make the mistakes of the 70s and let broad monetary inflation get a toehold in the US economy. Such an unfortunate event would trigger even higher long-term rates, thrusting mortgage rates far too high and halting the current expansion rather abruptly.
Right now, it appears the economy is going to adjust to Katrina rather faster than originally expected. Ports are opening back up faster, and refineries are coming back on line. While a great deal remains to be done to get harvests and shipping back up to speed, and caution is the best policy, it may be that things are back to "normal" for most of the country by late October and the re-building process will be going full blast by then. If so, Katrina will only slow the economy by a small amount.
Then we can go back to worrying about the concerns we were focused on in late August: a housing bubble, slowing consumer spending coupled with high energy costs, trade and budget deficits, etc. If the house price increases do not slow down, I think the Fed will continue its course of measured rate increases.
In Greenspan's latest speech at Jackson Hole he could not have been clearer about targeting "asset prices," and specifically the rise in housing prices. He intends to at least slow, if not stop, the rise in home prices. My expectation is that, even if the Fed pauses in September, they will resume the measured increases in November.
They will continue until home price increases have stopped and inflation in other quarters is not a threat. This will slow the overall economy. Make no mistake about that. But Greenspan made clear he views not doing anything to have far more serious consequences.
By John MauldiJohn@FrontLineThoughts.com
John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. To subscribe to John Mauldin's E-Letter please click here: http://www.johnmauldin.com/
