With Inflation On The Rise, Stagflation Ready To Rear Its Ugly Head
Posted on 12 December, 2010 | 64 Comments
Be it a bushel of wheat from Kansas, a ton of rice from India or a barrel of crude from Saudi Arabia, prices for all manner of commodities are on the rise across the globe, a trend that is starting to pinch consumers.
Copper prices in particular have surged about 50% since June, reaching US$9,091 a tonne on news that JP Morgan had bought up more than half the copper on the London Metals Exchange (LME).
Prices of many other raw materials continue to surge, with gold, silver, cotton and sugar reaching record highs. The effects are rippling from financial trading floors to local stores, forcing consumers to shell out more for everyday basics — a cup of coffee, a box of cereal, a gallon of gasoline.
Those increases are being driven in part by short supplies of some crops and raw materials caused by poor weather in major producing regions and robust demand from emerging markets such as China and India. Investors and speculators also are pushing up prices as they jump into rising commodity markets. They are being drawn to these so-called hard assets to hedge against inflation and the risk of further devaluation of the dollar and other paper currencies.
But that fear of inflation could ultimately be the fuel that feeds it, analysts warned. Billions of dollars are moving into oil, and then it becomes a self-fulfilling prophecy.
This year alone, raw coffee prices on commodity exchanges are up 60%. Corn and soybeans, the basic feed for hogs and cattle, have risen 39% and 26%, respectively. Wheat, a dietary staple for many cultures, is up 33%, and sugar is up 23%. Crude oil prices are up 9% this year to nearly $87 a barrel.
Even napkins and tablecloths to set the table have grown more expensive to make: Cotton prices have leapt 100% this year, to $1.51 a pound, a high not seen in this country since the Civil War.
This latest run-up in commodities, which began in late August, so far has boosted prices only modestly for consumers. But next year the impact could be far more serious, particularly if harvests for major crops are poor, Wall Street and agricultural analysts warned.
This weekend, China announced inflation had soared to 5.1%, well above its targeted rate of 3%; led by food inflation which was up more than 11% year over year. One should expect a similar trend to take hold in the US and Canada.
Retail food prices in the US have already started to rise after remaining relatively flat for the first half of the year. General Mills Inc., citing higher costs for grain and other ingredients, is raising prices on some of its breakfast cereals this month and some baking products in January. Kraft Foods Inc. said during a call with analysts last week that it had raised or planned to raise prices on about 40% of its products sold in the U.S., including coffee and cheese.
Starbucks said it would charge more for some its larger drinks because the cost of its coffee beans is skyrocketing. Rival Peet’s Coffee & Tea Inc. already has jacked up prices, blaming the run-up in raw coffee. In September, the Emeryville, Calif.-based chain tacked on 10 cents to the price of most of its drinks and 8% to the price of bagged beans sold in its stores.
Citing cotton costs, apparel makers Jones Group Inc., Hanesbrands Inc. and VF Corp. have said they expect to boost clothing prices by as much as 10% early next year. From grocery stores to gas stations and most other consumer stops in between, price inflation is shaping up to be the biggest economic story ahead. Even if traditional measures of consumer prices aren’t yet showing major increases, consumers know what they see.
The big danger with inflation in today’s current economic environment lies in the fact that US unemployment remains stuck at 9.6 percent, wages are mainly stagnant, and the housing market is still near recession lows. As prices of every day consumer staple items go up, that leaves less money available for discretionary items.
Inflation with unemployment, otherwise known as stagflation, is undeniably a major headwind for the economic recovery. Stagflation also tends to poses a dilemma for the Fed Chairman. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It is not possible to do both at the same time. In the late 70’s and early 80’s, Chairman Paul Volcker at the time conquered stagflation, but only by dramatically boosting interest rates, causing a severe recession in 1981-82.
Thus far, Fed officials have taken comfort that surveys and bond-market behavior suggest the public expects the inflation rate to fall. But that credibility is now in endangered as bond yields increased contrary to the Fed’s best efforts to keep rates low via its Q2 easing.
Jeff Kaminker
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