Worst Inflation in 27 years

The Commerce Department released the June personal income and spending report Monday morning showing inflation is growing faster than most economist expected. As reported by MarketWatch, the worst in 27 years. By my calculation that was 1980, when Paul Volcker limited the growth of the money supply, abandoning the previous policy of targeting interest rates.

Nominal spending grew 0.6% on the month, but the increase was all due to higher prices, which spiked 0.8% -- the most for a month since 1981.

Unfortunately the Fed is walking a tightrope hoping inflation expectations do not become elevated. Is the current 2% Fed Funds rate too low? Mondays numbers would suggest so.

The Fed seems committed to keeping its interest-rate target steady at 2%, in an effort to balance the risks of a more severe economic slump against the risks that inflation could get out of hand. The June income and spending report highlights both sets of risks in bold letters.

The Fed's commitment to targeting interest rates may be abandoned; just as Volcker was forced to target inflation.

However, the change in policy contributed to the significant recession the U.S. economy experienced in the early 1980s, which included the highest unemployment levels since the Great Depression, and Volcker's Fed also elicited the strongest political attacks and most wide-spread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors onto C Street and blockading the Eccles Building.

Unemployment has already started to creep into our economy with the rate at 5.7%. One has to wonder if corporations are able to keep employment levels in tack if a worsening slowdown deepens.

One asset class that performed well during that period up until rate increases was Gold. Will history repeat itself?