Judging by the media’s positive reaction to today’s larger than expected increase
in the core CPI, the Fed’s propaganda campaign regarding the “threat” of
deflation appears to be working perfectly.

In order to further inflate the housing bubble and re-inflate the stock market
bubble, the Fed needs to keep interest rates as low as possible for as long
as possible. The only way to do this is to convince bond and stock buyers that
inflation is not a threat. The Fed is accomplishing this by an ingenious campaign
of misdirection in which it pretends to worry about deflation. Therefore any
larger than expected increases in the CPI (which already greatly understates
inflation) initially can be ignored, or even championed as being a victory
over the fabricated deflationary threat.

The question remains how much higher will investors allow the CPI to rise
before they realize that they have been duped. Once it finally becomes clear
that the threat is and has always been inflation, it will be too late for the
Fed to do anything to stop it from spiraling out of control. Ironically, if
the Fed were to raise interest rates to combat the inflationary monster that
it created, the CPI would actually begin to rise even faster because of the
heavy weighting in the index of owner equivalent rent, which will rise proportionally
with mortgage interest rates. In addition, higher interest rates would weaken
the economy, exacerbating capital flows out of U.S. dollar assets, putting
additional upward pressure on prices. However, I believe that the housing bubble
is the Fed’s baby, and it will do all in its power to keep it alive, even if
it must kill the dollar in the process. As a result, the threat is not merely
inflation, but hyper-inflation