Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Rising Consumer Inflation: The New World Order By Commodity

Economics / Inflation Jan 13, 2011 - 05:36 AM GMT

By: Dian_L_Chu

Economics

Best Financial Markets Analysis ArticleEver since the Great Recession, inflation has been put on the back burner, and deflation is seen as the greatest risk to the U.S. economy. Even as recent as Friday, Jan 7, Federal Reserve Chairman Bernanke told the Senate Budget Committee that low inflation/deflation was a concern, as well as unemployment (more on the jobs situation here.)


Deflation Concern Lead To QE2

In fact, Bernanke said the continuing high unemployment and low inflation had prompted the Fed's decision to purchase another $600 billion of U.S. government debt (QE2) to further stimulate the economy.

So far, the two inflation measures—Consumer Price Index (CPI) and Producer Price Index (PPI)—have not proven him wrong yet, as both indexes have been subdued in recent months.

Well, expect this nice peaceful trend to change as early as the December CPI and PPI releases this week.

Pent-Up Inflation Pressure Up The Supply Chain

During the past decade, Finished Goods PPI has risen roughly 35% while the CPI was up about 30%, which seems to suggest producers typically pass through most of the cost increases to the end market.

And news such as the following could only mean that there’s pent-up inflation pressure up the supply chain just waiting to be passed through:

  • Commodity prices jumped to two-year high on expectations for global economic growth and lower U.S. forecasts for agricultural inventories. 
  • The Food Price Index (See Charts Below) compiled by the U.N. Food and Agriculture Organization (FAO) surged 25% in 2010 and hit an all time high in December, at the level even worse than the food crisis in 2008. FAO acknowledged that this is unlikely the peak yet.


And if you think the 25% spike in food prices seems extreme, wait till you check out the Non-Food Agriculture (NFA) prices. The chart below from The Economist shows that the NFA prices were up almost 80% in 2010! NFAs are agricultural materials with heavy industrial applications such as cotton and rubber.

Fixed-Price Terms Gone For Good

Now, many (including Bernanke) posit that since raw materials now account for a smaller percentage of input costs, the record commodity price inflation will not necessary translate into price increases in end markets.

However, I believe that argument was valid in the pre-China era when commodity prices were relatively predictable, easier to hedge, labor costs were low in the developing countries where most of the manufacturing activity took place, and fixed-price and/or fixed-escalation clauses were the norm in contract terms.

Commodities Weigh on Cost Structure

With record surging commodity prices, raw materials are becoming a bigger component of company’s cost structure. Many goods and services producers are now starting to index their supply contracts to input materials to adapt to this New World Order of Commodity.

For example, the latest such movement involved rare earth metals, which are key materials in Fluid Cracking Catalysts (FCC) used in the refining process to produce gasoline.

WSJ reported that due to the skyrocketing rare earth metals prices, chemical companies have started indexing the cost of their catalysts to rare-earth price movements. WSJ further noted that the added costs from rare earth metals, although not significant to make consumer notice, is enough to make some refiners to think about cutting production.

This just illustrates either the cost gets passed through, or there could be production cuts as a result--both translate into higher prices for consumers. .

Raising Prices Could Mean Losing Business

Basically, Fed’s QE has devalued the dollar while propping up everything from stocks to commodities, but with very little impact on the labor market. This has resulted in two totally disjoint pictures between the corporate profit and the general consumer/labor market.

The Standard & Poor’s GSCI Spot Index of 24 commodities has rallied 21% in the past year, and is expected to stay on the uptrend partly on expectations for global economic growth. Meanwhile, the spread between the 10-year note and Treasury Inflation Protected Securities (TIPS) which represents expectations for consumer prices, widened to 2.40%, near an eight-month high.

As inflation expectations and commodity prices are rising, corporations could face headwinds when they need to start raising prices, and lose business, due to a still weak consumer market, or face margin and the subsquent stock price pressure.

Respect the New World Order By Commodity

In today’s environment, the best way to hedge inflation is probably to invest--through patience and discipline--in commodities (See here for investment options) and stocks (via a broad index fund such as SPX) on pullbacks.

And keep in mind there are two things for certain--inflation will be steadily rising no matter what time frame you are looking at...and prices of commodity and stock will have pullbacks.

Disclosure: No Postions

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in