Agflation not Oil Prices

More of my colleagues are agreeing with me that no cut would be the right move, even if they think the FED might cave to market pressure this time.

Many, however, mention rising oil prices as a concern. I don't see that. First, as far as I can tell crude is in a slight bubble. Crack spreads are declining and some of the smartest players are becoming at a minimum less long crude and probably starting to take out short positions. At a minimum crude's upward swing is limited by Saudi fears of letting the alternative energy genie out of her bottle. There is reason to believe that basic R&D is the big stumbling block here and $100 crude will interest a lot of alternative energy venture capitalists.

Agricultural prices are a different beast. Not to put too fine of a point on it, but remember when you were supposed to finish your dinner because of all those starving kids in China? Well they're not starving any more. They are out bidding you.

Couple that with the demand for bio-fuels, increased transportation costs and climatic instability and I see a recipe for sustained increases in food costs over the coming 2 - 5 years. While these forces are not monetary in nature it is hard to refer to a sustained increase in the price of a basket of goods as something other than inflation.

The FED will have to respond to this secular trend in a effort to manage inflation expectations even if they know that the fundamentals are ultimately transitory.