Inflation Situation

The inflation thrust indicator through May was again very strong
on a yr/yr basis and is consistent with 12 month readings on the
CPI of 3.5% - 4.8%. Inflation pressure still stems largely from
the powerful uptrends in energy and other commodities indices.
An array of purchasing management surveys show that an
ever increasing majority of companies are paying higher prices
for materials and services, and this, on a global basis. So far
in this global expansion cycle, the pass through of the longer
run surge of commodities has been muted, but as more
companies face profit margin pressures, pass through will come
easier as the costs of maintaining or increasing market share
pile up. Wage pressures in the large block of OECD economies
have remained subdued, to the detriment of household buying
power. Sluggish Western economies reduce labor mobility, but
when faster growth does return, mobility will pick up swiftly
and the cheapskate companies will start losing their better
people, the threat of outsourcing notwithstanding.

Short term, the energy markets -- oil, gasoline and natural
gas -- are all extended even against powerful uptrends. This
does leave the door ajar for some inflation relief, if only
seasonally.

At some point ahead, the major emerging economies like
China and Brazil will feel the effects of the slowdown underway
in the large developed economies. Perhaps then operating
rates for a broader range of energy and industrial commodities
will begin to decline. Interestingly, US primary materials
providers were still operating well above long term averages
through April, '08.