Inflation is Back with a Vengeance. Will it Stay?
Recent inflation is not exactly ground shattering news, I do realize. What is somewhat alarming are some of the stats behind this story. The fed has long used ‘core inflation’ as an indicator of how much more we are spending over time for the same materials. What ‘core inflation’ does not take into consideration are gas and energy prices as well as food prices, which have both exploded over the last year.
Lately, the Fed has started to talk about real inflation, including food and energy, because it’s simply been too alarming to ignore any longer. Let’s take a look at how we got into this mess and whether or not it’s here to stay.
When you break it down we all know that fuel prices have skyrocketed. The exact reasons are somewhat unclear, but it appears to be a mixed drink of a number of factors including rising demand from emerging economies like India and China, OPEC collaboration to limit production, speculators on Wall Street, and even the possibility that we’ve reached ‘Peak Oil’ – the anticipated point where the world’s oil supply hits peak production capacity, while demand continues to increase.
Additionally, grain prices have skyrocketed, driving up the costs of just about all food prices. Why has this happened? Good ole’ ethanol and growing worldwide demand, for starters. With ethanol being the ‘in thing’ as a knee jerk reaction to offset carbon emissions (and ethanol producers profiting massively), corn, the prime component of ethanol has been in high demand. With corn prices high, farmers profit when they grow it. As a result, they’ve given an incredible about of acreage to the crop and limited acreage to all other crops. This has resulted in the prices of all other crops increasing across the board.
Not only have other crops increased in price, but all foods with the exception of fruits and vegetables are primarily based upon production of these grains. Cows, hogs, and chicken all need food to eat. As a result, milk, eggs, and meat have all risen in price. Let’s also not forget that our food has to get from the place of production to our local supermarket, and someone has to pay for the price in fuel increases. Whom may that be? Here’s a hint: consumers don’t have the option of passing along prices increases. One domino after the other.
This year alone has seen some huge run-ups in prices across the board on everyday commodities that we consume. We’re at the half-way point for the year, let’s take a look at the score board:
- Crude oil +42.5%
- Ethanol +20.7%
- Unleaded gas +39.5%
- Heating oil +43.9%
- Natural gas +76.5%
- Cattle +1.0% (surprisingly low, maybe hormones have been increased to offset the grain increases?)
- Corn +58.8%
- Soy bean +26.4%
- Wheat -2.2%
- Coffee +5.9%
What about some of the commodities, which are often purchased as a hedge against inflation?
- Aluminum +32.7% (think canned goods)
- Copper +25.7
- Silver +13.4%.
- Platinum +33.4%
- Gold + 6.0%
When inflation goes up, the markets usually go down.
- S&P 500 -10.24%
- Frankfurt DAX -18.32%
- Seoul Composite -9.57%
- London FTSE -12.23%
- Paris CAC -19.64%
- Hong Kong Hang Sang -18.33%.
- Tokyo Nikkei -9.47%
- Singapore Straits -14.04%.
- Sydney All Ordinary -15.76%
- Taipei Telex -7.40%
- Shanghai Shanghai B -44.42%
We truly do live in a global market, eh?
The Broad Effects of Inflation
The media has jumped on this idea that ‘everything else is still cheap’ and as I mentioned earlier, the Fed has talked up the fact that ‘core inflation’ is still very low. Everything else being the non-food or energy related goods. Although this may be true at this exact moment in time, there are troubling signs that this is all about to change. Recently, Dow Chemical (and a resulting slew of other chemical companies) raised prices 25% across the board, just one month after raising them 20%!
Why is this big news? Dow and it’s competitors are engaged in the manufacture and sale of chemicals, plastic materials, agricultural and other specialized products and services. Dow services customers in 160 countries, helping them to provide fresh water, food, pharmaceuticals, paints, packaging and personal care. They produce approximately 3,100 products.
“The higher bill at the end of the day winds up in the lap of the consumer,” Ben Johnson, a Chicago-based analyst at Morningstar Inc., said in a Bloomberg Radio interview. “It’s going to eventually filter through to those core inflation numbers.”
What can you Do to Fight Inflation?
You do have some options. Stay tuned for upcoming posts!
In the meantime, I’d love to hear what you think about all of this.
- Are you worried about inflation?
- Do you think it’s here to stay?
- What kind of problems is it causing for you?
- What kind of global problems do you see inflation creating?