After another volatile week in the market, we landed just about where we took off at the beginning of the week.  We saw a flurry of economic data out this week, lead by the CPI (Consumer Price Index), which saw its fastest rise in six months.  Food and energy costs were the main culprits, all signs that point to more upcoming bad news on gas, oil and food.

Food prices saw their biggest leap in 18 years in April but saw a modest gain in May.  But, it’s still a fact we are paying 10% more for milk than we were a year ago.  Airline tickets jumped on the surge in fuel costs, which now costs us more the $4 a gallon to fill up our own vehicles.  On the bright side, costs for clothing fell by 0.3%.  This gives merit to the old saying, “All dressed up and no place to go.”

The continuing inflation fears have caused Federal Reserve Chairman Bernanke to adopt the “tough talk” line in his speeches.  Earlier this week, Bernanke said the Fed will “strongly resist an erosion of longer-term inflation expectations,” comments that raised concerns in the financial markets about upcoming interest rate hikes.  The fed is certainly in a tough spot at this time.  On one side, you have economists that believe a weak economy, financial credit worries, an ongoing housing crisis and rising unemployment will keep the central bank from actually raising rates until much later this year.  Also, does Bernanke have the guts to raise rates with an upcoming election?

On the other side, some economists see inflation concerns increasing, not diminishing. Also, rising yields on short-term treasuries (biggest jump this week in a dozen years) and a weak dollar, point to the need for the fed to raise rates.  Now, you know why God created economists, it’s to make weather forecasters look good.  Though opinions vary, the two main facts are these, higher rates are needed to head off inflation, but higher rates would not help the ongoing housing crisis and a stagnant economy (stagflation).  We don’t think it’s a question of whether or not the fed will raise rates, the question is when will they start.  Hopefully, the upcoming June 25th Fed meeting will provide more clarity.