INFLATION AT WHOLESALE LEVEL HIT 11 PERCENT IN APRIL

The U.S. Producer Price Index, which tracks the prices that manufacturers charge for the products leaving their factories, grew to 11 percent in April, year over year, slightly slower than the 11.5 percent notched in March, the Bureau of Labor Statistics reported.

Month over month, gasoline prices were up 1.7 percent and groceries gained 1.5 percent in April. Prices for vehicles and related equipment added 0.8 percent.

The slackening of inflation’s pace at the wholesale level was accompanied by a similar easing in the Consumer Price Index. (See related story in this issue.)

TREND FORECAST: Earlier this month, the U.S. Federal Reserve raised its key interest rate by a half-point in an attempt to rein back inflation, jacking the rate to 0.75 to 1 percent.

Futures markets are pegging the Fed’s base rate at 2.5 percent to 3 percent by the end of this year. 

Considering that consumer inflation is near a 40 year high, real interest rates are in negative territory. As we have noted, the International Monetary Fund demands its borrowers raise interest rates to at least one percent above the inflation rate. Therefore, using IMF calculations, U.S. interest rates should be at 9.3 percent. 

Again, the higher interest rates rise, the deeper the economy and equity markets will fall. And despite all the Fed Head tough talk, should both equities and economies quickly melt down as a result of rising rates, we forecast the Fed will halt future rate hikes.