Nick

 Bucheleres  
February  17,  2011  
 
Our  Friend,  Inflation  
 
  The  Labor  Department  released  January’s  core  price  index  (CPI)  today,  which  relates  
prices  within  the  economy  and  is  regarded  as  the  hallmark  inflationary  gauge  for  tracking  price  
fluctuations.        With  no  secession  of  Bernanke’s  $600billion  bond  buy-­‐back  in  sight,  inflation  is  on  
everyone’s  mind.    The  CPI  rose  0.3%  in  January,  after  rising  0.4%  in  December.    These  numbers  
are  giving  some  investors  fears  about  allowing  inflation  to  run  off  with  their  money,  but  these  
fears  are  seemingly  unfounded.    Inflation  is  actually  our  friend-­‐-­‐  especially  in  a  global  economic  
recovery.      
 

 
 
The  above  chart  relates  the  S&P  500,  the  XAU  (which  tracks  gold  and  silver  prices),  and  SPDR  ETF  
WIP  (which  tracks  international  government  inflation)  since  May  of  2008.      
 
As  we  can  see,  the  S&P  500  and  inflation  move  positively,  and  often  times  move  at  the  exact  
same  pace.    Gold  and  silver  prices  follow  the  same  pattern,  but  are  a  bit  more  volatile.      
 
Inflation  is  raising  the  price  of  inputs,  which  are  relayed  from  manufactures  to  consumers,  but  
higher  prices  are  not  negatively  impacting  aggregate  demand.    Also  rising  with  inflation  are  
nominal  wages,  and  consumers  do  not  seem  to  take  issue  with  paying  higher  prices,  as  they  are  
almost  seen  as  inevitable  at  this  point.      
 
“Rising  tide  lifts  all  boats,”  and  the  daily  awe-­‐inspiring  corporate  earnings  reports  are  testament  
to  this  phenomenon.    With  blue-­‐chips  crushing  expectations  from  the  technology  sector  to  
farming,  it  looks  like  the  duality  of  inflation  is  showing  its  “nice-­‐face.”  Instead  of  decreasing  
consumers’  wealth,  it  is  bringing  all  other  prices  to  par  with  the  inflated  frontrunners.