Commodities Challenge Bernanke Inflation View: Chart of the Day

Record prices for industrial commodities may challenge Federal Reserve Chairman Ben S. Bernanke’s view that raw materials will create a “transitory” boost in U.S. inflation, according to Euro Pacific Capital Inc.

The CHART OF THE DAY shows the Journal of Commerce-ECRI Commodity Price Index reached the highest since at least 1985 yesterday after the Fed more than doubled its balance sheet to $2.6 trillion in the past three years. The difference between yields on two-year Treasuries and inflation-indexed debt, a gauge of expectations for consumer-price gains, has climbed with commodities to reach a 33-month high this week.

“The cheap money Bernanke’s using to prop up the economy is the same cheap money that’s causing commodity prices to rise,” said Peter Schiff, president of Euro Pacific in Westport, Connecticut. “The Fed is going to pretend inflation doesn’t exist, even though it’s creating it.”

Bernanke said on April 4 any boost to consumer prices would be “transitory” as long as expectations for inflation remain stable and well anchored, and the rise in commodity prices slows. If those assumptions prove to be incorrect, the U.S. central bank would have to respond to maintain price stability, he said.

Kansas City Fed President Thomas Hoenig, who has described the latest round of bond purchases as “unnecessary,” said on March 30 that the central bank’s policies are partly the cause for surging commodities. Ford Motor Co., Wal-Mart Stores Inc. and Krispy Kreme Doughnuts Inc. have cited rising raw-materials costs when raising prices in recent weeks.

The Journal of Commerce-ECRI index tracks 18 commodities, including burlap, tallow, plywood and steel. Gold will reach $2,000 an ounce “when people understand that inflation is here, and it’s going to be severe,” said Schiff, who predicted in 2006 that the U.S. was headed for recession. Bullion touched a record $1,463.70 on the Comex in New York yesterday.

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