Inflation Notes

The sharp uptrend in the broad CRB Commodities Index underway
since early in the year is starting to break down as a reflection
of developing weakness in fuel feedstocks. This index can be
volatile over the short run, so one does not want to make a big
deal out of a break in the short term trend. Even so, it is
worth noting.

US productive capacity growth continues to lumber along at a
modest 2.3%. This continuing low rate of growth is below US economic
demand growth potential and remains a sore spot in the US outlook.

It is good to see Def. Sec. Bob Gates spreading balm around in
discussing the middle east, particularly Iran. The Cheney Show,
which involves threatening talk in Iran's direction, is not smart
as such talk helps kite the oil price, suppress US consumer real
incomes and puts more dough in Iran's coffers.

The headline CPI advanced at a 4.7% annual rate in Q1 '07. Looking
short term, this has pushed the inflation adjusted, after tax
return on 90 day paper into negative territory and has led to
weakness in the US dollar. The dollar now needs the attention of
US officials since it is trading down near long term support. It
will be interesting to see if moderation in the broad commodities
composites might give the dollar a lift and stave off the issue of
whether the US is willing to allow the dollar to fall below support.