So far this year, the U.S. stock market is up about 6%, while emerging markets are down 4%. The S&P 500 rose 1.4% last week, and is up 4.1% in the past two weeks, closing Friday at 1,329, its highest mark since June 2008.

The Nasdaq is also near a four-year high, despite a sharp drop in Cisco Systems (NASDAQ: CSCO) last week. The market obviously likes a relatively peaceful resolution in Egypt, but the latest rise is mostly due to another strong earnings season, with 70% of reporting companies beating their revenue targets, too.

Global Food Price Inflation Continues

The fact that the respected Egyptian military is now in charge of the country seems to be the best near-term political solution, at least until Egypt’s upcoming elections. But I’m afraid that chronically high food prices are going to continue to spark social unrest in poor countries like Algeria, Egypt, Tunisia and perhaps even China. On Wednesday, the United Nations Food and Agriculture Organization (FAO) issued a rare alert that said north China’s ongoing drought is “potentially a serious problem.”

The UN report implied that China’s wheat crop is in serious jeopardy as Shandong province “is bracing for its worst drought in 200 years.” The UN said that water shortages in the wheat regions are a likely factor behind the 8% rise in wheat flour prices in the last two months (and +16% in the last year). To combat rising food prices, China has imposed price controls on a number of foodstuffs in recent months and is selling its government stockpiles. Wheat-based noodles are a staple food in China, and any further upward pressure on wheat prices could undermine the Chinese government’s ongoing inflation battle.

On Tuesday, the People’s Bank of China raised its key interest rate 0.25% for the third time in the past four months in an attempt to combat inflation. Effective Wednesday, China’s one-year lending rate rose to 6.06%. Brazil, South Korea and other emerging nations have also raised rates in attempt to fight inflation, but since people have to eat, it remains unclear how these rate increases can arrest inflation.

This week, the U.S. inflation indicators will be released on Wednesday and Thursday, and we will likely see a continuation of 2010’s abnormally small numbers, since food is a much smaller proportion of the Consumer Price Index (CPI) in the United States, and we also give undue weight (40%) to a depressed housing index called “Owner’s Equivalent Rent.” Due to these statistical flaws, Federal Reserve Chairman Ben Bernanke continues to deny that inflation is a problem in the United States. On Wednesday, Bernanke appeared before the House Budget Committee and said, “We do not now have a problem” with price inflation.

Amazingly, despite persistently rising Treasury bond yields and soaring commodities, Bernanke said “there is no indication in our financial markets that in the U.S. there is an expectation of inflation.” And now, since another inflation “hawk” is leaving the Fed, we are liable to hear more such “inflation denial.”

Inflation ‘Doves’ Eclipsing ‘Hawks’

When Bernanke was pressed by members of Congress on when and how the Fed will begin tightening, Bernanke said “I want to repeat that we are extremely vigilant” and added “we will be very careful to make sure that we don’t wait too long.” Translated from Fedspeak, he essentially implied that the Fed’s quantitative easing program might end before June, but he may have just said that to appease critical House members, since the Fed Chairman stressed that “inflation in the U.S. is very, very low.”

Mr. Bernanke faced several hostile House members last week. House Budget Committee Chairman Paul Ryan (R-Wisc.) was very critical of the Fed’s quantitative easing plan, saying, “There is nothing more insidious that a country can do to its citizens than debase its currency.” Then, at the House Budget Committee hearing, Rep. Ron Paul (R-Texas), said, “over $4 trillion in bailout facilities and outright debt monetization, combined with interest rates near zero for over two years, have not and will not contribute to increased employment.”

The Fed is clearly dominated by inflation “doves” appointed by President Obama, so the Fed will likely remain very accommodative, at least until unemployment significantly drops. This dovish majority is now more dominant than ever, since Fed Governor Kevin Warsh announced Thursday that he will resign next month. Governor Warsh was appointed by President Bush and is part of Bernanke’s “inner circle.”

Mr. Bernanke said Warsh’s “intimate knowledge of financial markets and institutions proved invaluable during the recent crisis” and added, “I deeply appreciate his insights and wise counsel, and most especially his fortitude and friendship during the difficult days, nights and weekends of the crisis.” Translated from Fedspeak, this seems like an uncharacteristically emotional admission that the current Fed Chairman feels he is being abandoned by many of his closest colleagues and is finding his job to be increasingly lonely.

Some of the remaining hawks at the Fed are Dallas Fed President Richard Fisher and Richmond Fed President Jeffrey Lacker. Both Fisher and Lacker were vigorous and vocal opponents of the Fed’s decision to implement a second round of quantitative easing in November, and both men stirred the pot a bit on Tuesday when they each made cautionary comments about the QE2. In fact, Fisher said that he would firmly oppose expanding the Fed quantitative easing program.

Over in Europe, the doves are also overpowering the European Central Bank (ECB). On Wednesday, an unidentified senior euro zone government official told Reuters that the German Bundesbank chief Axel Weber (an inflation hawk) is no longer a leading candidate to replace ECB President Jean-Claude Trichet. This was shocking news, since Weber was widely believed to be a leading candidate to replace Trichet in October. Perhaps the more permissive euro zone powers, like France, don’t like Weber’s hawkish tone! On Friday, it was formally announced that Weber would resign at the end of April for “personal reasons.”

I should add that higher euro zone interest rates continue to cripple member nations like Portugal, which hit record high bond yields last week, raising additional bailout fears. Bottom line, it appears that both the ECB and the U.S. Fed are clearly willing to “enable” their respective government’s growing fiscal irresponsibility, thereby crippling the central banks’ ability to combat inflation. But fortunately, growth stocks remain a great inflation hedge and should continue to benefit from rising government bond rates.