Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21
Last Chance to GET FREE Money Crypto Mining with Your Desktop PC - 2nd May 21
Will Powell Lull Gold Bulls to Sweet Sleep? - 2nd May 21
Stock Market Enough Consolidation Already! - 2nd May 21
Inflation or Deflation? (Not a silly question…) - 2nd May 21
What Are The Requirements For Applying For A Payday Loan Online? - 2nd May 21
How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part1 - 1st May 21
INDIA COVID APOCALYPSE - 1st May 21
Are Technicals Pointing to New Gold Price Rally? - 1st May 21
US Dollar Index: Subtle Changes, Remarkable Outcomes - 1st May 21
Stock Market Correction Time Window - 30th Apr 21
Stock Market "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom" - 30th Apr 21
Three Reasons Why Waiting for "Cheaper Silver" Doesn't Make Cents - 30th Apr 21
Want To Invest In US Real Estate Market But Don’t Have The Down Payment? - 30th Apr 21
King Zuckerberg Tech Companies to Set up their own Governments! - 29th Apr 21
Silver Price Enters Acceleration Phase - 29th Apr 21
Financial Stocks Sector Appears Ready To Run Higher - 29th Apr 21
Stock Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues - 29th Apr 21
Get Ready for the Fourth U.S. Central Bank - 29th Apr 21
Gold Mining Stock: Were Upswings Just an Exhausting Sprint? - 29th Apr 21
AI Tech Stocks Lead the Bull Market Charge - 28th Apr 21
AMD Ryzen Overclocking Guide - 5900x, 5950x, 5600x PPT, TDC, EDC, How to Best Settings Beyond PBO - 28th Apr 21
Stocks Bear Market / Crash Indicator - 28th Apr 21
No Upsetting the Apple Cart in Stocks or Gold - 28th Apr 21
Is The Covaids Insanity Actually Getting Worse? - 28th Apr 21
Dogecoin to the Moon! The Signs are Everywhere, but few will Heed them - 28th Apr 21
SPX Indicators Flashing Stock Market Caution - 28th Apr 21
Gold Prices – Don’t Get Too Excited - 28th Apr 21
6 Challenges Contract Managers Face When Handling Contractual Agreements - 28th Apr 21

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.


© 2005-2019 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