Barring a gigantic collapse in oil prices, the upward and above-trend drift in inflation is likely to persist until the Fed decides to tighten policy to fight it. With all the focus on saving the economy, that is not likely to happen soon. The gold market has been on top of this, which is why gold prices are in the range of $900 today, up hugely from $300 when inflation hit a low point in 2002-2003. The dollar is up today as the whole world worries about bank failures and the dollar is seen as some port in a storm, but the dollar remains very weak from an historical perspective, and that confirms the message of gold prices; the Fed is not paying sufficient attention to the value of the dollar.
I don't think any of this means the end of the world as we know it. But I do think that we see here the seeds of the next thing the market will worry about once the subprime mess simmers down. Rising inflation has been bad for the economy (inflation is always bad for growth), but an inflation-fighting Fed won't necessarily be bad for the economy. Tighter monetary policy will be bad for Treasury bonds (higher yields) but very good for confidence, and that's good for the economy.
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