We expect price pressures to continue to rise over the intermediate and long-term, though some moderation is expected in the short-term due to easing energy prices.  This will keep pressure on consumers, businesses, and the Federal Reserve.  Wholesale prices rose 9.8% in the 12 months ended in July, the largest annual pace in 27 years!  This report also showed that inflation is spreading into a wide range of goods outside of just energy and food.

The Federal Reserve has made it clear that the weakening economy and credit debacle take priority over inflation.  This puts us in a difficult position when we consider how rising food and energy prices have essentially lowered the standard of living for many households.  We all see the increase in gas and energy prices, but what is not as easily seen in the rise in retail food prices (retail food prices are already up 6% this year).

Last Friday, Fed Chairman Bernanke spoke at a conference for central bankers in Jackson Hole, Wyoming on financial stability.  He said that recent declines in commodity prices and stabilization of the dollar were “encouraging,” and that although the inflation outlook is uncertain, the Federal Reserve will act as needed to maintain price stability.  His comments along with comments made by famed investor, Warren Buffet, helped equities finish the week on a high note.  Buffet said on CNBC that stocks are “more attractive” today than they were a year ago and that he currently does not have any bearish bets against the dollar.  He said he also has increased a stake in one of his financial firm investments.

We still see the potential for continued stagflation (a stagnant economy with inflation).  The Federal Reserve certainly has a fine line to walk.  While raising rates would help on the inflation front, it would certainly not help the struggling economy.  On the other hand, keeping rates low to help the economy, while letting the inflation genie out of the bottle, would only lead to a longer term battle with inflation down the road.