Sunday, December 26, 2010

Happy Boxing Day

Before settling down for the holidays I pre-wrote this post and scheduled it for Boxing Day for you reading pleasure.

I hope every one's Christmas went well.

No doubt driving around to visit friends and family you took time to fill up your gas tank.

If you live in Greater Vancouver, your jolly spirit will have been tempered by gasoline prices which have touched north of $1.20 per litre ($1.22 at some stations).


Gas has gone back to the highs we experienced when oil was at over $140 per barrel, whereas right now oil is at $90 per barrel. What gives?

Even better, government statistics tell us that inflation has fallen to 1.3%.


In the inflation/deflation debate, you will see a great many analysts predict that inflation fears are a ways out. They argue that until debt deleveraging runs its course, and credit demand picks up, inflation will remain low. Until the velocity of money increases, we will we not see significant inflation.

I disagree.

Make no mistake... I agree that there is a significant amount of debt deleveraging still to occur.

But we will see these deflationary pressures coincide with inflation.

A blogger I follow articulated it best.

He noted that most folks only understand and recognize demand-pull inflation.

This is the classic demand side, Phillips Curve inflation, that says rising wages, employment and wealth cause economic expansion which leads to more money chasing a static amount of goods.

New, excess demand "pulls" prices up and the result is price inflation.

With deleveraging picking up steam, and credit continuing to contract, demand-pull inflation cannot take hold.

Pretty simple stuff.

But what we have been experiencing, and what will intensify in 2011, is a forgotten strain of the inflation beast called currency induced cost-push inflation.

This type of price inflation is caused by producers and merchants being forced to pass along through higher prices the rising cost of inputs to their products.

Consumers, particularly the lower-and-middle income ones, bear the brunt of the pain.

Your income isn't rising to keep pace with rising expenses and you get squeezed. Hard. And its not luxury items that are going up in price, its the staples. Bread, milk, gasoline, clothes, eggs, meat... the basics that no one can realistically live without.

Bloomberg reports beef prices increased 6.2% above last November, with steak prices up 5.4% and ground beef prices up 7.4%. Pork is up 12.9%. Poultry prices (including turkey) up 3.2%.

Egg prices increased 4.7%. Dairy 3.8%. Cheese 5.4%. Ice cream and related product prices 32.1%.

Cereal and bakery product prices are down 0.3%, but rapidly rising wheat futures mean prices can only be held in check for so long.

Meanwhile coffee, sugar, and wheat are up over 35%.

Consumers are going to be hit with sticker shock and 2011 is going to be a mean year.

Why will input costs go up?

Simple, they are all dollar-dominated and with US Federal Reserve now engaging in Quantitative Easing to infinity, all dollar-dominated assets are going up in price. Significantly.

That's why businesses like McDonalds are already letting consumers know they plan on raising prices next year. As noted by the Wall Street Journal:

  • "Timing and executing price increases can be tricky as McDonald's and other companies are caught between paying more for key materials such as meat and wheat, and keeping prices low to attract price-sensitive customers in a still-weak economy."

Even that bastion of low prices, Wallmart, has been forced to hike prices. Inflation is raging in China and their costs are soaring. Wallmart simply cannot procur products at the same low wholesale costs.

So prices rise in North America while wages stagnate and deleveraging/credit contraction continues.

And it's nothing compared to what's coming.

Currency induced cost-push inflation has already arrived and is at work. Mark my words. In the midst of a tremendous amount of deleverageing, 2011/2012 is going to be a time of skyrocketing prices.

Pants, coats, groceries, gasoline, you name it.

Come next Christmas you will be wondering what hit you.

Good news though. The government will come out with Consumer Price Index stats that tell you inflation is only around 1%.

As I have posted before, the way government calculates inflation was changed in 2000. Everything that realistically affects the CPI has been stripped from the statistics.

Calculate inflation the way it was pre-2000 and inflation is raging at over 7%.

Take another look at those price changes above. Which statistic do you believe... inflation at 1% or inflation at 7%?

"Four legs good. Two legs better." Couldn't have said it better myself, George.



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1 comment:

  1. Inflation is better than deflation, right?
    On a related note, awesome pic!