Jim Rogers recently commented on the under-reporting of inflation (click here). I’ve expressed similar views in previous posts, but Jim’s thoughts should not be ignored whether you agree with him or not. Today’s PPI is not having much of an impact in deference to the CPI data coming out tomorrow, but without question - the recent fascination with interest rates will heat up again in the next 24 hours.

Regardless of what the government says tomorrow and the resulting investors’ reactions, we have to be mindful of global inflation and the internationally integrated economy that has evolved the past few years. When I reflected on the 3.4% inflation reported by China - a few thoughts came to mind. First of all, it’s not as high as it was in 2004 and it’s lower than India’s rate of 4.85%. But what really stuck out is China’s food inflation of 8.3% while non-food inflation was only 1%. If you thought we had increasingly high food prices, it’s not any different in other parts of the world. Sooner or later, China will undoubtedly have to raise their interest rates and deal with some of the currency issues, but in the meantime, they’ll just suffer through inflation that will not likely disappear with any of their attempted solutions. At least not in the short term.

The more I think about global inflationary pressures, the more I worry. The rapid growth in China, India and the emerging markets coupled with the return to growth in Europe and Japan are tough to ignore. It’s often said that inflation happens when too much money chases too few goods and we have that scenario on a global scale. There is a ton of liquidity flowing and because of it,  almost every asset class is inflated - commodities, equities, real estate, etc. Given the economic growth in the rest of the world, the low-priced labor that has provided a dampening effect on product prices is starting to disappear with many companies operating near capacity and feeling a pinch on labor as well as equipment and supplies that are becoming scarce.

Rates are heading higher all over the world and while US investors may think we can escape that impact because of our tepid domestic growth, I disagree. We live in a global economy and regardless of whatever goofy data the BLS puts out, we have significant inflation here and it is not going away. Other central banks are doing their job by trying to allow for maximum growth that can be sustained within their targeted inflation bands. However, the dramatic increases in energy and commodities are finding their way into inflation whether you want to ignore them or not. The slowdown in housing is a domestic US event and while that certainly is helping keep inflation slightly in check, we need to think on a bigger scale. Increasing inflation in high economic growth countries such as China and India leads to higher inflation in places like Europe and the US through the inevitable raising of emerging market export prices.

The Fed is in a tough spot. Global inflation that affected us in the 70’s and into the early 80’s is back. While many of the world’s central banks are facing certain interest rate hikes to deal with the impacts of their domestic and global inflationary pressures, the US is primarily having to deal with the global kind. So tomorrow, when you hear the CPI report, make sure you give some thought to what really matters - inflation in parts of the world we are largely powerless to affect.