In light of this morning's CPI report the markets are now seemingly of the belief that inflation is still a problem and the Fed will continue to raise short term interest rates. A couple of items came to our attention that indicate that the economy is still strong and inflation will remain a problem for some time to come.

Jeff Matthews notes that former Fed chairman Alan Greenspan's favorite single economic indicator continues to indicate stronger growth, not weakness.

If I’m right, Greenspan is contemplating the fact that U.S. industrial capacity utilization hit 81.9% last month, its highest level since July of 2000…

Which is why, in my opinion, the producer price index might have been ten basis points less than expected yesterday, and the housing market from Boston to Sacramento may be rolling over, and the bond market may find comfort in weaker revenues than expected at Home Depot…but Alan Greenspan’s favorite all-time index is heading up, not down.

In addition Ticker Sense has a study that has implications for inflation and the stock market. They examined periods in which the 10 year Treasury yield has increased at least 20% year over year. The results:

…a year/year change in bond yields of 20% or more has accurately foretold rising inflation in all but one period (3/84). Unfortunately for stock market bulls, the market doesn't fare as well. The average gain in the S&P 500 over the next year averages only 1.0%.

Unexpected inflation is the bane of the capital markets. At this point even a dip in commodity prices will be unlikely to lift the gloom hanging over the markets. Maybe that Alan Greenspan guy knew something retiring when he did.

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