Tamed inflation or not? 

Does Bernanke not "get it" or is he trying to calm investors down?

I chatted with a subscriber this morning after the CPI data came out showing that inflation increased only .2% ... below the expectation.

Here is his interesting observation:  "I'm semi-retired and make $36,000 a year. I estimate that I have paid $100 a month more for household food and gas in the past few months.  That comes out to a .3% increase, which was slightly above the CPI's .2%.  Doesn't the government doesn't understand how this is affecting millions like me? That extra $100 a month caused me to cut back on going out to eat 3 to 4 times a month.  My friends are doing the same.  I think that it is no coincidence that 3 of our favorite restaurants have closed in the past 2 months."

- England and other countries are saying that inflation is on the rise in spite of a slowing economy. The U.S. is saying that it is "different" for us ... that we will have slowing inflation.  Wall Street pit traders are not buying that story for a second. 

Who's right?

The 10 and 30 year bond market yields give us a good clue to what is really happening.  The higher the 10 and 30 year yield's move, the higher the associated/expected inflation. 

Here is what Bond Yields are trying to tell all of us ...

30 Year Yields: If you look at our 30 year bond yield chart below, you will see that a long term descending channel was broken to the upside in February. 

The yields went on to form an inverted Head & Shoulders pattern.  This means that the likelihood is that the 30 year bond yield will move up to 53 this year, reflecting an increase in inflation.

10 Year Yields: If you look at our 10 year bond yield chart below, you will see that a long term resistance line was broken to the upside in April.   This technically ended a one year down trend in 10 year yields.

Conclusion: Both the 10 and 30 year bond yields are signaling that they will be moving higher this year which makes the Bernanke "we don't see any inflation argument" rather disingenuous .

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