Inflation Is In The Rear View Mirror

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoOKMz5QYK9w&refer=home

U.S. Economy: Consumer Prices Rise More Than Forecast (Update1)

By Shobhana Chandra

Aug. 14 (Bloomberg) -- U.S. consumer prices rose at the fastest pace in 17 years in July, limiting the ability of the Federal Reserve to lower interest rates as economic growth slows.

The cost of living climbed 5.6 percent in the year ended in July, the Labor Department said today in Washington. It was up 0.8 percent from the previous month, twice as much as anticipated. So-called core prices, which exclude food and energy, also advanced more than projected.

The surge last month reflected energy prices that have since declined, signaling July may represent the peak in inflation. Still, increases went beyond food and fuel, including gains in clothing, airline fares and education, likely intensifying discussions among Fed policy makers about how quickly to shift toward raising rates.

To play the contrarian, the increase in prices across almost all categories shows capitulation.

I think the market is rallying because this could be the peak of inflation. As I have been writing, I think that commodities have peak in the intermediate future. Also, I think that this inflation numbers represent a level of price increases that if commodity prices stay at this level will lead to margin expansion. This explains the run-up in all companies that have been hurt by raw material costs.

It is foolish to recommend Proctor & Gamble (PG), Clorox (CLX), CL (Colgate), and the like after this recent run up. However, when we see a pullback, they should be worth it.