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The government just reported that consumer inflation surged 0.8% last month. That’s the fastest rate in more than two years. The year-over-year rate is now 4.31%, which is slightly more than where the Fed is. Still, I’m an inflation skeptic. The government’s numbers most certainly understate the rate of inflation, but I’m only concerned if inflation seems to be getting out of hand.

The core rate was just 0.3% last month. Yes, yes, I know the core rate comes in for a lot of criticism, but I think it’s important to watch. For nearly twelve straight years, the year-over-year core rate has never been greater than 3% or less than 1%. Also, long-term interest rates are still quite low.

In fact, more Fed rate cuts could be on the way. The rate on short-term Treasury bills are still far below the Fed Funds rate. Yesterday, the T-bill rate closed at 2.78%, the lowest since the August panic. The Fed is about 140 basis points above the market.

Posted by edelfenbein at December 14, 2007 9:25 AM