The Federal Reserve has decided to lower interest rates in the past two weeks in order to pump liquidity into the system because the banks “miscalculated” the risk in their mortgage holdings.

The government has repeatedly said that they are watching inflation but that it does not pose an imminent threat.

It’s funny that it seems to be threatening just about every other nation and, oh yes, a lot of companies too.

South Africa’s Federal Reserve is meeting this week to decide its interest rate policy. They will likely keep rates as they are because:

The Reserve Bank has lifted its key repo rate by 400 basis points since June 2006 to 11 percent as it fights to bring down targeted CPIX consumer inflation, which jumped to 8.6 percent in December, breaching the upper end of a 3-6 percent band for the ninth straight month.

Poland actually had the guts to raise their rates this week:

Poland’s Monetary Policy Council (MPC) raised interest rates on Wednesday as expected to try to curb rising inflation despite signs of a slowing economy and is likely to further tighten monetary policy ahead.

The MPC raised the central bank’s main rate by 25 basis points to 5.25 percent and said in a statement it saw inflation above 3.5 percent in the near term with risks to further acceleration of wage growth.

Of course, Poland is also seeing growth rates around 6.5% which might have something to do with their inflationary biases.

Then there is Chile. Their inflation rate surged to 7.8% in December. Chile keeps raising its rates but still it can’t contain the inflation. From Bloomberg:

“Inflation is a worry in Chile and depending on how it evolves, the central bank may need to raise rates further in the first half of this year,” said Bertrand Delgado, a Latin America economist at IDEAglobal Inc. in New York.

It’s not just countries that are seeing the increases either.

Hershey’s, the chocolate maker, just announced across the board 3% increase on all of its goodies. And it gets better. From the WSJ:

In a conference call with investors yesterday, Hershey Co. Chief Executive David West said the candy maker has seen “an unprecedented run-up in costs over the last couple of years.”

Hm…”unprecedented.” Where have we seen that word before?

Oh yeah, the Domino’s Pizza CEO said the same thing just a few weeks ago.

And Kraft Foods. Cheese prices rose 50% in just the last quarter alone. From their conference call yesterday:

Irene Rosenfeld, chairman and CEO, said: “We’ve significantly reduced our cost structure and strengthened our portfolio with the acquisition of Danone’s global biscuit business and the announcement to exit the Post cereal business. While we face an unprecedented input cost environment, we enter 2008 with good momentum and remain confident that we will deliver reliable growth over the long term.”

Tyson Foods just sent notice to its food-distributors that it was pushing through a 7 percent across the board hike.

And on and on and on.

You get the picture.

And what is our Fed doing?

Cutting interest rates.

Please let me know when your cheeseburger is $20.

Oh, but remember, we don’t have inflation here. That only happens in Poland. Or Chile. Or South Africa. Or Australia. Or China.

Not in America.

Don’t look now, but the inflation bogeyman is on the loose and may be already under your bed.

November’s PPI number came out smoking hot yesterday. (Today is the CPI- so stay tuned.) The PPI paints a picture of what producers are paying for items. November’s PPI was the highest since 1973. Here is some of the reaction (which I find amusing) from Marketwatch.com:

Ugh,” said John Ryding, chief U.S. economist for Bear Stearns, in reaction to the producer price index results. “This is a horrible inflation report. Our reading is that both import prices and producer prices point to significant inflation problems ahead.”

But I thought inflation was “moderate”?

“This is the long anticipated flow through from high oil prices into the more general economy,” said Michael Lynch, president and director of global petroleum service with
Strategic Energy and Economic Research Inc. “I think we’re going to see greater effects in the coming months. This is a black day for [Federal Reserve Chairman] Ben Bernanke.”

Wait a minute- I thought that $95 crude didn’t matter and that the American consumer was fine with higher prices at the pump?

Gosh darn. I can’t believe this turn of events.

You mean record high crude, gold, soybean and wheat prices might, gee-whiz, actually mean higher prices on other products?

I had no idea.

(Sarcasm off.)

But seriously, folks, Wall Street is not paying attention. They are so worried about their own bonuses and the collapse of their own house of cards that they are missing out on what the real story is.

Inflation is back.

It means the Fed will have to raise not lower interest rates in the next year.

And it means that Gold is going higher. Much higher.

Prepare your portfolio. There will be money to be made.

A few weeks ago, the Fed said that they were concerned about inflation yet next week they will cut rates again to help save the financial sector from itself.

Who will save us from the inflation bogeyman?

So far this year:

Energy

Crude is up 45.3%
Heating Oil is up 58.3%
Natural Gas is up 15.9%
Unleaded Gas is up 41.1%

Metals

Copper is up 10.7%
Gold is up 23.1%
Platinum is up 26.8%
Silver is up 9.0%

Agriculture Commodities

Cattle is up 4.0%
Soybeans are up 58%
Wheat is up 73.1%

What will the Fed do today? How much will they cut? (if at all?)

We will soon find out.

But even if the rate cut is a quarter or fifty basis points, one thing is for certain: inflation is lurking.

I don’t know what data the Fed looks at. And frankly, with the financial crisis as bad as it is, they may simply have no choice (inflation or no inflation.) I’ve said many times in the past five years, the Fed is d*mned if it does (raise rates) and d*mned if they don’t. Several years ago- the Fed had the choice to raise rates faster than they did- but they would have crushed the housing market if they had done so. They chose not too.

The housing market got crushed anyway. And now, here we sit in 2007, with the specter of inflation looming.

There are several generations of Americans who have no memory of inflation and why it must be fought at all costs. They have no idea who Chairman Volker is and why he is considered a hero to many (it was he who raised interest rates to double digits to finally crush inflation and put the genie back into the bottle.)

Can you even imagine this Fed raising rates to, say, 7%?

Me neither.

Yet businesses around the country are raising prices- some quietly and some not so quietly.

Who is raising prices?

Fedex recently announced it was raising express rates by 6.9%- effective in January 2008- to offset higher fuel costs and rising expenses on their Chinese roll-out. It was the largest price increase since 2001.

Kimberly-Clark recently announced 4% to 7% price increases. From the Associated Press:

Kimberly-Clark Corp., the maker of Kleenex tissues and Huggies diapers, said Tuesday it would raise prices next year to offset higher costs for raw materials and energy.
The company said that beginning Feb. 3 it will boost prices by 4 to 7 percent on Huggies diapers and swim pants, Pull-Ups training pants, Goodnites youth pants, Cottonelle and Scott bathroom tissue, and Scott and Viva paper towels.

Kimberly-Clark sells more than $4 billion of those items annually in the United States, about one-fourth of the company’s total revenue.

Energizer, the maker of batteries, flashlights and shavers, is also raising prices. From the St. Louis Business Journal:

Energizer expects material costs to continue to be unfavorable in the next quarter compared to the first quarter of fiscal 2007. The company will implement price increases and other product cost savings to fully offset the increase in costs.

Raw Materials and Energy Costs Are Hurting

It’s the same complaint across the board. Kellogg had decent earnings but warned about 2008 because grain and wheat prices have gone through the roof. Kellogg and its competitor General Mills are actually packaging their cereals in smaller boxes- in effect raising prices on consumers because they are giving them a smaller product.

Same with Dow Chemical- which saw earnings hurt from higher energy costs. The airlines are all feeling the pinch as well.

There is nothing the companies can do except try and pass the increases along to the consumer. Some will be more successful than others.

A Fed rate cut won’t help this growing dilemma. By flooding the marketplace with even more money, it will only exacerbate it.

The stock markets may cheer the Fed’s decision- but companies are already facing the reality of record high metal, grain and oil prices. That is their reality.

And it’s soon to be ours (the consumers.) Once inflation is let out of the bottle, it is very difficult to contain.

Just ask Volker.