Deflation party's end game

18 September 2009 By Ian Campbell

US prices are about to change direction. A 2%plus inflation rate is possible by year end. But investors still expect the nearzero funds rate to continue for a long time. If they re wrong, financing conditions could get tighter fast, taking the bounce out of the bubbly markets.

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US consumer prices rose by 0.4% in August, with a 9.1% rise in gasoline prices the main factor behind the rise. The annual inflation rate was 1.5%. The socalled core consumer price index, which excludes volatile food and energy prices, rose by just 0.1% in August, for an annual rise of 1.4%, the lowest since February 2004.

Charles Plosser, the president of the Philadelphia Fed, said this month that a rateincreasing cycle would probably not begin this year but that the Fed may eventually face the need to be as aggressive raising rates as we were in cutting them.

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