Food & Gas Prices Rattle Consumers. Does Fed Even Care About Inflation?

Stocks are up today (Dow +73, S&P +8) as global growth sentiment outweighs the “not-a-war” in Libya, fiscal crisis in Europe, Japan’s earthquake aftermath, and declining consumer sentiment. Bonds are slightly higher (10yr Note +3 basis points, FNMA 30yr 4% coupon +12 basis points) despite the stock rally and hawkish inflation statements from two Fed officials this morning.

The U.S. growth mood was underscored today by +3.1% GDP. This inflation-adjusted figure is the third of three 4Q2010 GDP readings. It was .2% above expectations and .3% above the second reading last month. The upturn was mostly to do higher exports, lower imports, and a 4% increase in consumer spending which was the largest since the fourth quarter of 2006.

Fast-forward to this month and the consumer isn’t as rosy because of rising food and gas prices. At 67.5, March Consumer Sentiment was down 12.9% from February and down 8.3% since last year. March is the lowest level since November 2009 and the tenth largest monthly change ever. Only one in four consumers expected their situation to improve in the year ahead.

The consumer sentiment survey results remind us that food and gas prices are important inflation inputs, though many market participants (including the Fed) focus on “Core” inflation that excludes food and energy due to their volatility.

But this doesn’t mean is Fed blind to inflation as two FOMC members remind us today. Atlanta Fed president Dennis Lockhart confirmed today he’d vote for less accommodative rate policy as higher inflation data dictated. And Dallas Fed president Richard Fisher was firm on inflation saying: “We’ve done enough, we’re at risk of doing too much.”

Today is relatively calm for rates, and rates remain extremely low as mortgage bonds continue to be a good bet. This could change as the inflation picture heats up, and as we near the June 30 end of the Fed’s second round of Quantitative Easing. More on this in tomorrow’s WeeklyBasis report.