What is the CPI?  The CPI, Consumer Price Index, is a broadly used gauge of inflation.  From what I gather, the CPI includes everything including food, energy, and other high volatility prices.  The Core Index is a much narrower gauge of inflation stripping out high volatility commodities such as energy.

So how does all of that relate to us today?  Here’s the situation the Fed’s in.  On one hand, the U.S. is in a credit and housing crisis.  Injecting liquidity into the market may help ease the situation.  The Fed can increase liquidity through a number of avenues but the most widely liked choice is through reductions in interest rate.   But what happens when interest rates are cut?

Every time interest rates are cut, the fear of inflation increases.  But if the fears of inflation increase, the Fed, at their bi-monthly FOMC meetings, will be hard pressed to cut interest rates.  So on one hand you have investors clamoring for interest rate cuts to ease the credit crisis, but on the other hand the lower interest rates go, the higher inflation fears become.

This morning, the CPI and Core Index were released showing a larger rise in inflation across the board.  Futures are down as a result.  Why?  There is now data to support Bernanke’s decision to lower interest rates in a stepwise fashion while keeping a “balanced” concern on inflation and the credit crisis.  If this morning’s data isn’t revised (it appears quite a bit of data is revised weeks after their initial release), does this mean Bernanke’s correct and that he really does know something?  If inflation continues to creep upward, does that halt or even raise concerns of an interest rate hike?  Oh, the predicament!

So now I’m fairly confused and concerned.  On one hand, you have a credit and housing crisis.  I would argue the crisis is more the result of greedy investors with some legitimate homeowners caught in the crossfire, but that’s for another discussion.  On the other hand, inflation’s creeping upward.  As a relatively poor college student, it’s becoming more and more difficult justifying $4.99 for a gallon of milk.  But if something isn’t done about the credit and housing crisis, the U.S. may enter a period of stagflation, which I could only assume may be worse than a recession or a period of inflation.  Anyone else just as confused or concerned as I am?