April 18, 2010

Food and Energy Price Inflation

Inflation Up 2.3% from Last Year, Gasoline Prices Have Soared 41.1%

April 14, 2010

Inflation remained tame in March, as U.S. consumer prices edged only slightly higher due mostly to higher fresh fruits and vegetables costs, the Labor Department reported Wednesday.

The Consumer Price Index, the government’s most closely watched reading for inflation at the consumer level, rose 0.1% in March. February’s CPI was flat and marked the first time prices had not advanced since March 2009.
"Inflation as a concern is relegated to the distant future," Guy Lebas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia, said on Bloomberg. "It gives the Fed the flexibility to keep rates low for a while."
Helping to keep prices contained in March were flat energy prices, as increased electricity costs were offset by lower gasoline and natural gas bills. For the past year, however, energy prices have soared 18.3%, with gasoline leading at 41.1%.

Those costs drove inflation up 2.3% over the past 12 months compared to a 2.1% increase the Labor Department reported during the 12 months ending in February.

Core consumer prices, which strip out volatile food and energy prices, were unchanged during the month of March. While core inflation was still up 1.1% from a year earlier, it was the smallest gain since 2004. Month prior respective increases were 0.1% and 1.3%.
"The rate of inflation was very low this month and still somewhat below the historical average," Andres Carbacho-Burgos, an economist for Moody’s Economy.com, was cited on CNNMoney.com. Adding that the annual rate has historically been between 2.4% to 2.5% and core inflation rate between 1.7% to 1.8%.
The 12-month core inflation rate is right within the Federal Reserve’s comfort range of 1%-2%.

Inflation Adjusted Gasoline Prices

December 11, 2009

Back in 1980 - 81 we were shocked as gas prices rose above $1.00 for the first time. This was especially shocking because just four years earlier in 1976 gas was $0.60 per gallon and in 1969 it was only $0.35 a gallon. But by 1981 only 12 years later it was a full dollar higher at $1.35. That is an increase of 286% in 12 years!

In 1981 that $1.35 would be the equivalent of $3.21 in inflation adjusted terms for 2009 dollars.

Compare that to the price increase from 1998 where the average price was $1.02 and by July 2008 it had increased to $4.02 and you have a 294% increase in 10 years. But that is to the monthly peak price. Amazingly the average price for all of 2008 was $3.23. Almost identical to the price in 1981 when adjusted for inflation.

Interestingly, the average price of a gallon of gas from 1918 to the present is $2.37 in inflation adjusted dollars.

If we look at the average annual Inflation adjusted gasoline prices for each of the following years (1958, 1968, 1978, 1988, 1998, and 2008) we see the following:

Inflation Adjusted Gasoline Prices:
Year & Price


So if the long term average price is $2.37, then in 1988 gas was very cheap and in 1978 it was only slightly below average; but in 1981 and in 2008 it was extremely expensive on a historical basis.

In 1998 gas had gotten really cheap by historical standards allowing people to buy gas guzzlers like SUV's and Hummers. But that reversed in 2008 as prices rose above the long term average.

As of this writing, the monthly average price of gasoline in November of 2009 was $2.61 just slightly above the long term average price of $2.37, with the Annual Average for 2009 at $2.28 being extremely close to the long term average.

Remember that these are average annual prices and individual months had much higher averages and on a weekly or daily basis prices could (and did) spike much higher.

According to the US Energy Information Administration, the average price of a gallon of gasoline in March 2008 cost $3.21 ... although I know in many places like California people would have been glad to find gasoline for $3.21 a gallon so in addition to averaging over time it is also averaging over the whole country.

I spent several weeks driving around California in March 2008 and often saw gas closer to $4.00 a gallon and then actually saw $5.00 a gallon in May in Alaska. Granted that was more of a supply/demand issue (it was the only station for a hundred miles and all the gas actually came from a refinery thousands of miles away). The irony of the matter was across the highway within site of the pump, was the Trans-Alaska pipeline, transporting crude on the beginning of its thousands of miles trip.

The chart above right shows the Average annual Gas prices in nominal terms (what you actually pay) and in inflation adjusted terms (red line) ...

U.S. Inflation to Appear Next in Food and Agriculture

The National Inflation Association
October 30, 2009

While most mainstream economists such as Nouriel Roubini are warning of deflationary threats to the U.S. economy, it is our belief that massive price inflation has already begun. The Federal Reserve's policy of massive monetary inflation in 2009 has caused the Dow Jones to bounce over 50% from its low, oil to rise 100% from its low, and gold to surge to a new all time nominal high. One NIA co-founder just saw his health insurance premium rise 16% over a year ago; and the average tuition for a four-year public college increased this year by 6.5%.

Prices are rising all around us, yet agricultural commodities have for the most part been left behind and remain at historically depressed levels. Fundamentals for agriculture are improving on a daily basis. A worldwide shortage of farmers combined with food inventories falling to record lows is setting up the perfect storm for an explosion in agriculture prices. There is a huge opportunity today to invest at the ground-floor into what will likely be one of the biggest boom industries of the next several decades.

Advanced Economic Solutions estimates that food inflation will rise to by an average of 9 percent annually between 2008 and 2012, as the rising costs are passed on to consumers. As was experienced during the 1970s, food price inflation rates are moving higher during the next five years as a result of sharply higher commodity input prices. While the precise yearly levels of food inflation are difficult to predict, the rising commodity prices clearly suggest that food prices will rise more dramatically during the next five years. - Rising Commodity Prices and their Impact upon US Food Infation, Advanced Economic Solutions, June 2008

Wheat is currently down 60% from its all time nominal high set in 2008 and 80% from its inflation adjusted high set in the 1970s. Corn is currently down 50% from its all time nominal high set in 2008 and 75% from its inflation adjusted high set in the 1970s. Wheat and corn have only bounced 13% and 26% from their 52-week lows this year respectively. While sugar has faired much better and is now at a 28-year nominal high, sugar is still down 70% from its inflation adjusted high set in the 1970s.

With crude oil back above $80 per barrel, we will soon see a renewed interest in alternative energy. This will create increased demand for wheat, corn and sugar which are used to make ethanol and other biofuels. A massive rise in agriculture prices is just around the corner.

We receive countless emails on a weekly basis asking about if Real Estate is now a good investment and if rents will likely climb during hyperinflation. While rents will increase nominally during hyperinflation, they will plummet compared to agriculture. No longer will Americans eat more than most other countries, yet spend less of their income on food. When Americans are forced to pay more for food, it will take away from what they can spend on rent.

The average American consumer today spends approximately 30% of their income on housing and only 10% of their income on food. We expect these numbers to reverse in the years ahead as the U.S. dollar loses its purchasing power. In Germany during hyperinflation, rents fell from 30% to less than 1% of the average households' expenditures while food rose from 30% to a high of over 91%.

The U.S. is currently the world's largest exporter of wheat and corn and the fifth largest exporter of sugar. When American consumers purchase food at their local supermarket, they are competing against consumers from all around the globe. As the Federal Reserve prints trillions of dollars out of thin air and causes our currency to lose its purchasing power, Americans won't be able to afford to eat as much and farmers will be forced to increase their exports to countries with stronger currencies.

When it comes to an apartment in the U.S. that a landlord is trying to rent to a tenant, there is no global market to drive rent prices up. The rents landlords receive depend on the strength of the local U.S. economy. With unemployment continuing to surge and a huge glut of homes on the market, it is only a matter of time before real rent prices decline and become a smaller monthly expense than food.

While Americans will eat less in the years ahead, Chinese citizens will be able to afford to eat more. Despite China's rapidly growing economy, there are major food shortages in China. Chinese agriculture companies have a chance of becoming the market's biggest gainers of the next decade. Our last China agriculture stock suggestion gained over 83% after our profile in a little more than six months. We will be announcing our new China agriculture stock suggestion on Tuesday.

Income Falls 3.2% During Obama's Term

The Washington Times
April 13, 2010

Real personal income for Americans -- excluding government payouts such as Social Security -- has fallen by 3.2 percent since President Obama took office in January 2009, according to the Commerce Department's Bureau of Economic Analysis.

For comparison, real personal income during the first 15 months in office for President George W. Bush, who inherited a milder recession from his predecessor, dropped 0.4 percent. Income excluding government payouts increased 12.7 percent during Mr. Bush's eight years in office.
"This is hardly surprising," said Douglas Holtz-Eakin, an economist and former director of the nonpartisan Congressional Budget Office. "Under President Obama, only federal spending is going up; jobs, business startups, and incomes are all down. It is proof that the government can't spend its way to prosperity."
According to the bureau's statistics, per capita income dropped during 2009 in 47 states, with only modest gains in the other states, West Virginia, Maine and Maryland. But most of those increases were attributed to rising income from the government, such as Medicare and unemployment benefits.

Two of the most populous states in the country reported dramatic declines: Per capita income in California dropped 3.5 percent to $42,325; in New York, the drop was 3.8 percent to $46,957.
"The evidence from New York and California reinforces a basic lesson: Where government gets too large, prosperity suffers. Let's hope that the Congress learns this lesson before it is too late for the country as a whole," said Mr. Holtz-Eakin, who also served as chief economic policy adviser to Sen. John McCain's 2008 presidential campaign.
On the campaign trail, Mr. Obama often derided Mr. Bush for what he said were dramatically falling incomes for workers.
"American families, since George Bush has been in office, have seen average family incomes go down $2,000," Mr. Obama said in a September 2008 speech on the economy in Green Bay, Wis.
The bureau, which doesn't compile statistics on "family" income, reported that per capita income rose during Mr. Bush's two terms, from $29,159 to $32,632 (using 2005 dollar values as a base). During Mr. Obama's 15 months in office, per capita income has dropped nearly 1 percent to $32,343.

Economists agree that Mr. Obama inherited a severe recession, although some dispute that it is the "worst since the Great Depression," as Mr. Obama often asserts. Still, the dropping numbers show that the $862 billion stimulus package has not turned the tide on dropping incomes.
"All in all I think the [bureau's] data are just another confirmation of what we all know -- the recession has been just brutal, and while we may in the past couple of months have stopped the downward slide in jobs and incomes, we'll be digging out of a big hole for a long time," said Josh Bivens of the Economic Policy Institute.
Carol Moylan, chief of national income and wealth division at the Bureau of Economic Analysis, said comparing real personal incomes while excluding government payments is a good barometer.
"A lot of people like that number," she said.
The White House did not respond to requests for comments on the numbers.

Personal income with government "transfers" -- which include such federal money as Social Security, unemployment insurance, Medicare and food stamps -- has grown during Mr. Obama's time in office, up 1.2 percent from January 2009 to February 2010. During that period, government unemployment insurance benefits rose from $88 billion to $143 billion.

Despite a near doubling in unemployment payouts, Mr. Obama in February announced a multitrillion-dollar spending plan that boosted the federal deficit to a record-breaking $1.56 trillion.
"While the market income of Americans has fallen since early 2008, government assistance has offset this somewhat through greater transfer spending such as unemployment benefits and new tax credits such as the 'making work pay credit,' albeit at the expense of higher deficits," said Gerald Prante, a senior economist at the Tax Foundation organization.
Mr. Obama, who just finished pushing a $1 trillion health care reform bill through Congress, is falling behind on his predictions.
In a September speech, he said: "All in all, many middle-class families will see their incomes go up by about $3,000 because of the Recovery Act."
Other numbers show dramatic differences between the state of the economy in the opening months of Mr. Bush's first term versus that of Mr. Obama. While disposal income during Mr. Obama's term has risen $2.5 billion, extra cash for Americans rose $113 billion over Mr. Bush's first 15 months in office.

Meanwhile, the findings of a new survey of leading economists by the Associated Press found widespread pessimism over a quick recovery. The finding included ominous news:
The unemployment rate will stay high for the next two years and still be at 8.4 percent by the end of 2011.

Home prices will remain almost flat for the next two years, even after dropping an average 32 percent nationwide since peaking in 2006.

The economy will grow about 3 percent this year, less than usual during the early phase of a recovery, but few jobs will be added.

Even with Low Inflation, Households Still Squeezed

The Associated Press
April 14, 2010

The deep recession has caused inflation to all but melt away. The problem is that the same severe downturn has also translated into weak income growth.

Economists say it is no wonder that consumer confidence is at such low levels. Americans' pocketbooks are being squeezed, even though inflation remains a no-show in many ways.

For that reason, the prices that have been rising lately — in such areas as energy and food — seem to be having more of an impact than normal.
"At a time when wages have not risen, people are obviously more sensitive to any kind of price increases," said Nariman Behravesh, chief economist at IHS Global Insight.
Economists surveyed by Thomson Reuters are looking for overall prices to have risen by a modest 0.1 percent in March and to be up 2.4 percent over the past 12 months. That 12-month gain primarily reflects that the volatile sectors of energy and food have been showing gains recently.

However, excluding food and energy, the core rate of inflation is likely to show a small 0.1 percent increase in March and be up just 1.2 percent over the past 12 months. That gain would be well within the Federal Reserve's comfort zone, meaning the central bank can continue to keep a key interest rate at a record low where it has been for more than a year in order to jump-start growth and put the country on a sustained recovery from the Great Recession.

For all of 2009, inflation rose by 2.7 percent for the 12 months ending in December. That followed an even smaller 0.1 percent rise in 2008, which had been the smallest gain since prices fell by 0.7 percent in 1954.

Excluding food and energy, so-called core inflation was up 1.8 percent last year, the second smallest rise in four decades. The inflation figures were kept in check by the severe recession, which has depressed wages, the biggest component in the cost of production.

Workers saw their inflation-adjusted weekly wages fall by 1.6 percent last year, the sharpest setback since 1990.

Inflation-adjusted pay has sunk in five of the past seven years, underscoring the pressures households were feeling even before the recession began in late 2007.

In fact, the last period of strong wage gains occurred in the 1970s, when the country suffered double-digit inflation triggered by oil shocks. Many unions negotiated cost-of-living wage increases that only added fuel to the inflation fire.

Inflation was not successfully constrained until the Fed under then-Chairman Paul Volcker drove interest rates to levels not seen since the Civil War. It ended a debilitating decade in which successive oil shocks pushed the country into stagflation, a period when economic growth is stagnant and inflation is high.

Even with inflation at extremely low levels now, some economists are worried that the current period of exceptionally low inflation could be followed by inflation troubles down the road.

The worry is that the Fed will repeat a mistake many economists believe the central bank made following the 2001 recession when it left interest rates too low for too long, fueling an asset bubble in housing that pushed home prices to record levels only to end with a disastrous crash that pulled the entire economy into a recession.

These economists worry that the threat this time could be even more severe because not only has the Fed pushed its target for overnight bank lending to an all-time low but has nearly tripled the assets on its balance sheet in what has turned out to be a successful campaign to stabilize the financial system.

If the Fed makes a mistake in not draining those excess reserves from the system or in raising rates in a timely fashion, these economists worry that it could sow the seeds for a new bout of inflation.

To be able to safely guide policy, the Fed will need to depend on accurate readings of inflation and on that score some critics have charged that the government's most prominent inflation gauge, the Consumer Price Index, is flawed because it is not properly tracking housing costs.

But most economists discount that criticism, saying that the low inflation readings in the CPI are showing up in other inflation readings as well.
"There are problems with the CPI like any economic statistic, but overall it is doing a good job of measuring inflation," said Mark Zandi, chief economist at Moody's Economy.com. "It is pretty clear that inflation is low and slowing."
The Coming Global Food Shortage
Get Ready: Experts Project 2010 Will Be A Year When Food Prices Dramatically Increase
U.S. Food Prices ‘Spiraling Out of Control’
NIA: U.S. Food Inflation Spiraling Out of Control

Updated 5/6/10 (Newest Additions at End of List)

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