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With the December 2009 CPI now in the history book, the inflationary pressures following the collapse of oil prices in 2008 has worked its way through the system, leaving annual CPI inflation close to 3%. 

Importantly, what follows in the months ahead will be still higher annual inflation, with the pace picking up in response to the weak dollar policy of the “WE SEE NO BUBBLES” administration.  The 2009 weakening of the U.S. dollar resulted in a spike in oil and energy prices, as a well as in other dollar-denominated commodities.  Our 1Q2010 theme “RATE RUN-UP” is based on inflation stemming from 2009 monetary policy decisions, not from stronger economic demand in the USA.

The increase in the December CPI was primarily due to the Energy index, which rose 18.2% in 2009 after falling 21.3% in 2008.  The December CPI confirms some of the key issues facing the consumer.  The increase in the Energy index was caused by the gasoline index, which rose 53.5% in 2009 after declining 43.1% in 2008. The food index, which rose 5.9% in 2008, fell 0.5% for the 12 months ending December 2009, the first December-to- December decline since 1961.  The December CPI report was the first time since June 2009 that food-at-home prices rose faster than food-away-from home, and both increased for the month.  

Given the underlying reality that the economy is being propped up by the Obama Administration and a more serious inflation problem than is generally expected, the risks to reporting a trend towards higher-than-expected inflation and weaker-than-expected economic growth is growing.

Howard Penney

Managing Director

Inflationary Compares - bb