Inflation Situation

Headline inflation -- which is what people experience--
headed up sharply through the first five months of this year
reflecting not only a rebounding oil price, but a sharp
rise in gasoline realizations as well. The momentum of oil
producer crude lifting or downstream profits has been fading,
so focus has shifted to uptream profit generation via product
refining. In addition, there are increasing signs that US
economic growth will accelerate over the second half of this
year, and factory operating rates can be expected to rise.
This development can put further upward pressure on materials
prices. The growth of productive capacity has dropped to a scant
2.1% measured yr / yr through May.

My longer term inflation indicator -- a combine of selected
commodities and operating rate composites -- fell sharply over
the second half of 2006. The decline was steep enough to be
reminiscent of recession primarily because of the blow out of
the oil price as industry carry stocks mushroomed. Now, the
indicator is moving up, although June has been a quiet month.

There is no indication yet that a more prolonged acceleration
of inflation is set to occur, but with econ. output poised to move
ahead more firmly, the economy may regain an inflationary bias
beyond developments in the oil and petrol markets.