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Want Inflation Bernanke? Just Wait

The Consumer Price Index, the preferred measure of inflation used by Federal Reserve Chairman Ben Bernanke, is about to rise significantly, if its historic link to a measure of commodity prices holds true.

The so-called old commodity research bureau index, a measure of commodities such as oil and wheat, is up a whopping 31 percent year over year. When this index climbs by an annual rate more than 10 percent, the CPI usually follows and Treasury rates usually increase, according to John Roque, technical analyst for WJB Capital Group.

“Does he, or anyone else, really think the CPI accurately reflects anything other than government skullduggery?” said Roque, in a note today. “Here’s what we know about the cost of living: it is always underestimated.”

In the last 12 months, prices for palladium and cotton have doubled, while corn, silver and wheat have jumped 59 percent and gold has climbed 28 percent. But the latest reading from the Bureau of Labor Statistics showed that all items in the Consumer Price Index increased just 1.1 percent. The CPI measures rising prices for food, energy, apparel, autos and other costs for consumers.

The Federal Open Market Committee announced last week that it would be purchasing $600 billion of longer-term Treasuries to reach its goal of maximum employment and price stability because zero interest rates just aren’t cutting it anymore.

“Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow,” read the statement.

By looking at the wrong inflation measure, many investors feel Bernanke is simply laying the groundwork for our third asset bubble (technology, housing, bonds) in 15 years.

“Look at the last 10 years to see what the future will look like: successive bubbles and bursts,” said Brian Kelly, founder of Kanundrum Capital. “It will offer juicy opportunities for speculators such as myself, but the economy will be vastly more volatile than anyone expects.”

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