GET READY FOR INFLATION HELL
Either that, or insanely high interest rates

From Knight-Ridder via the Houston Chronicle:

It all adds up to pressure on the Fed to keep raising interest rates. Its mission is to control inflation — the increase in prices across the economy — and its main tool is the federal funds rate, the rate banks charge each other for overnight loans, which serves as a benchmark for commercial bank lending rates to consumers and businesses alike.

On May 10, the Fed's Open Market Committee raised the funds rates to 5 percent, the highest level in five years and the 16th consecutive increase since June 2004. Many hoped that the Fed wouldn't raise it again at the next meeting, June 28-29.

But Wednesday's numbers make another quarter-point increase seem probable.

For many Americans, the inflation data confirm what they're feeling in the wallet: A dollar isn't stretching as far. From April 2005 to April 2006, inflation ran at an annualized rate of 3.5 percent, while core inflation was at 2.3 percent. Energy-price inflation during that period was 17.8 percent.

On top of that, businesses' costs are soaring for energy, copper, other metals and other raw materials. With the economy growing rapidly in recent months, executives find they can pass more of these costs to consumers.

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Obviously, a lot of these inflationary pressures are because of oil: oil lubes everything in the economy, and, consequently, when oil prices rise steeply, all prices rise. But I wonder if it's just the oil. I posted recently about how federal deficit spending stands to trigger inflation which would surely result in higher interest rates in order to combat it. I'm still not sure if deficits have become high enough to start the downward inflationary spiral yet, but it seems to me that it's only a matter of time. The terrible stagflation of the 1970s was caused by, to the best of my knowledge, a very similar situation to what we have today. That is, massive spending on the Vietnam War coupled with an expansion in domestic spending crashed headlong into the oil crisis early in the decade. The result was self-sustaining inflation paired with recession: only a steep rise in interest rates along with some clever supply-side economic policy was able to pull us out. Unfortunately, the cure was a bitter economic pill for millions of working Americans who never really recovered from it. Today, we haven't expanded domestic spending as far as I know, but the psychotic tax cuts for the rich that Bush just signed into permanency amount to the same thing. In other words, we may very well be in for some deep shit, and, frankly, I don't think Bush and his advisors are really willing to do what it takes to head this off at the pass.

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