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Thursday, July 20, 2006

Inflation still rising

By Yaser Anwar, CSC of Equity Investment Ideas

The government announced recently that core inflation, excluding energy and food, jumped 0.3% in June.

"The CPI increased at a 5.1% annual rate in the second quarter and is up 4.3% in the past 12 months, matching the biggest gain since last October... It's the fastest increase in core inflation since December 2001... The major factor driving higher inflation was the cost of shelter, which represents more than 30% of the CPI," according to a MarketWatch report.

Largely attributed to the unraveling housing market, the increase meant that core inflation had risen for the past three months at an annual rate of 3.6%. That's well above the Fed's comfort zone of 2 - 3 percent

"The Federal Reserve has raised interest rates 17 consecutive times in an effort to slow the economy enough to keep inflation under control. But there is evidence that the relentless rise in energy costs is beginning to spill over into more widespread inflation problems," according to an AP report.

It was well-documented that Bernanke shocked the markets last month after he declared that the rise in core inflation was "unwelcome," according to the AP.

While a temporary lowering of energy prices helped to slow inflation in June, experts say the effect will be short-lived, as Middle East conflicts send crude prices through the roof to record highs.

"Investors are worried that the Fed could go too far in raising rates in its efforts to battle inflation. That would raise the prospects of a more severe economic slowdown and possibly even a recession," the news service reports.

"We must take account of the possible future effects of previous policy actions - that is, of policy effects still in the pipeline, " Governor Bernanke told the Senate Banking Committee today in Washington. "The extent and timing of any additional firming that may be needed to address inflation risks will depend on the evolution of the outlook for both inflation and economic growth."

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