The Perfect Storm is beginning to hit

Inflation in the US is rising:

Combined with figures last week showing consumer prices also rose more than forecast, today's producer-price report may prevent prompt the Fed to consider raising rates as soon as the economy stabilizes.

``What you've got is a lot of inflationary pressures building,'' said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, who correctly forecast the rise in core prices. For now, ``the Fed will put them in second position in terms of priority until this financial strife settles down,'' he said.

Over the past 12 months, producer prices rose 7.4 percent, the most since October 1981. Wholesale prices excluding food and energy advanced 2.3 percent in the year through January.

The median forecast of 70 economists in a Bloomberg News survey was for wholesale prices to rise 0.4 percent from December. Core prices were expected to advance 0.2 percent, according to the survey median.

Dollar hits record low:

The dollar sank to a record low against the euro as U.S. home prices and consumer confidence tumbled, bolstering bets the Federal Reserve will keep reducing interest rates.

The U.S. currency declined to the weakest level since the euro began trading in 1999, and slumped against all 16 of its most-active counterparts. It reached its lowest level of the day after Fed Vice Chairman Donald Kohn said turmoil in credit markets and the possibility of slower economic growth pose a ``greater threat'' than inflation.

Kohn's comment ``confirmed the Fed will keep cutting interest rates,'' said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world's biggest currency trader. ``That brought more downward pressure on the dollar.''

The dollar weakened to $1.4981 per euro at 4:32 p.m. in New York, from $1.4830 yesterday, falling past the previous historic low of $1.4967 set Nov. 23. The U.S. currency dropped to 107.24 yen from 108.07, and has lost 4 percent this year.

Oil breaches $100 again:

Crude oil rose above $US100 a barrel to a record close in New York as the weakening US dollar prompted some traders to invest in commodities as a hedge against inflation.

Reports today showed that US home prices tumbled, consumer confidence weakened and producer prices rose last month. Hedge- fund managers and other large speculators increased net-long positions, or bets on higher oil prices, in the week ended Feb. 19, a Commodity Futures Trading Commission report showed.

``The market is being driven by speculation, fear and psychology,'' said Stephen Schork, principal of the trading firm The Schork Group in Villanova, Pennsylvania. ``There were some investors who shorted oil when we reached $US100 ($108) last week, for whatever reason, and they panicked today.'' Shorts are bets that prices will decline.

Fears of recession:

Fear among U.S. consumers and businesses that the world's richest economy could go into a recession, or may already be in one, could help push the economy over the edge and bring on an even deeper, longer downturn.

In the final three months of 2007, the economy screeched to a near standstill, dragged down by what many economists say is the worst housing slump since the Great Depression.

As a result, talk of recession has been on the rise among Main Street people as well as economists, the media and a number of high-profile analysts, including former Federal Reserve Chairman Alan Greenspan.

With the housing market showing no sign of reaching bottom and mortgage-related losses mounting at Wall Street firms, many experts wonder if all the talk may add to the tendency of people to dampen their economic activity and spend less.

Fears of stagflation:

"It looks like there is no confidence in an economy where inflation is getting out of control," said Andrew Brenner, market analyst at MF Global in New York. "This is a classic stagflation scenario."

In the face of fresh signs of economic weakness, a top Federal Reserve official played down the risks presented by current price growth, saying the danger the U.S. economy will weaken further is a bigger worry than higher inflation.

House prices continue to tumble:

The (Case-Shiller) index fell to 170.64 in Q4, from 180.31 in Q3. A decline of 5.3%, or over 20% at an annual rate.

This is the lowest level for the index since Q1 2005.

Prices fell 8.9% in 2007 according to Case-Shiller.

The index is off 10.2% from the peak.