Hiddent Inflation: Food Prices Flying Under the Fed's Radar

Critics of the federal reserve cite the inflationary risks implicit in quantitative easing and other stimulatory policies. Defenders of such policies downplay these concerns by pointing out that the official rate of inflation has held steady. But with most government policies, G-d is in the details. Specifically, the core inflation index does not factor in food & gas costs in its calculations, both of which have substantially risen in the last year. Clearly, natural rises in demand and disruptions in supply are factors, but I strongly suspect that fiscal policy is a significant factor. In addition, government subsidies that direct corn towards ethanol production must not be overlooked. I anticipate that inflation will become more apparent once an economic recovery stimulates an increase in demand. This is not an abstract issue; rising food prices caused riots in Algeria and many other nations.

Hidden Inflation: Food Prices Flying Under the Fed’s Radar

Jan 28, 2011

By Jason Simpkins, Managing Editor, Money Morning

Soaring food prices have been, perhaps, the most pressing global issue of the past two years – yet the U.S. Federal Reserve has taken a “hear no evil, see no evil, speak no evil” approach to the global crisis.

Instead, the Fed has dutifully maintained its focus on so called “core inflation” in the United States – even as Americans suffer the consequences of the “hidden inflation” the government refuses to account for.

The Federal Reserve excludes food and fuel prices from its preferred gauge of inflation because they are often influenced by erratic weather patterns and political turmoil. That at times has been the case over the past few years.

Droughts in Russia and floods in Australia, for instance have helped drive food prices to record highs. However, the Fed’s monetary policy has also affected prices. The U.S. dollar has fallen substantially in the past three years, and the prices of agricultural commodities – which are priced in dollars – have reflected that decline. The result has been a chilling effect on consumers in local grocery stores and gas stations.

An 8.5% monthly gain in gasoline prices pushed the transportation costs up 2.3% in December, making it the driving force behind the consumer price index’s 0.5% headline gain. Core inflation, which excludes food and energy prices, rose just 0.1%.

Oil prices rose 10.2% in the period from Nov. 1 to Dec. 31, as rising demand in emerging markets and a subservient greenback pushed the price of crude over $90 a barrel for the first time in two years.

U.S. food prices rose 0.1% in December following a 0.2% increase the month prior. Prices were up 1.5% for all of 2010, with meat and dairy products making the biggest jumps. Beef prices were up 6.1% in December 2010 compared with a year earlier, while pork prices jumped 11.2% last month compared with December 2009.

And food prices are poised to climb substantially higher in 2011, spiking 2% to 3%, according to the U.S. Department of Agriculture’s Economic Research Service. That price jump will impact prices at grocery stores and restaurants.

For instance, a food basket survey by The Tennessean earlier this month found a 12.5% increase in prices for a typical grocery basket full of staples compared to November 2009. And McDonald’s Corp. (NYSE: MCD) – the world’s largest food chain – said yesterday (Tuesday) that it plans to raise prices this year to help offset an expected rise in its grocery bill for the 10 commodities that account for around 75% of its food preparation costs.

“As commodity and other cost pressures become more pronounced as we move throughout the year, we will likely increase prices to offset some but not necessarily all of these increases,” said McDonald’s Chief Financial Officer Peter Bensen.

The average price McDonald’s pays for its most used ingredients – beef, chicken, cheese, and wheat – is expected to go up by 2-2.5% this year.

The restaurateur’s major rival Yum! Brands Inc. (NYSE: YUM) and packaged food companies like Kraft Foods Inc. (NYSE: KFT) and Sara Lee Corp. (NYSE: SLE) are likely to see similar price increases.

Still, U.S. Federal Reserve Chairman Ben S. Bernanke insists that price pressures in the United States remain subdued.

“Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward,” the FOMC said in a statement following its Dec. 14 meeting.

The FOMC today (Wednesday) will conclude its first two-day meeting of 2011, and likely announce no significant changes to its monetary policy.

“While the Fed may identify higher commodity prices as a potential concern, policymakers are not likely to reverse course and tighten policy unless higher commodity prices push through to core inflation,” said University of Oregon economics professor Tim Duy. “Such an outcome appears unlikely given persistently high unemployment.”

In the meantime, the United States isn’t the only country suffering from higher food costs. In fact, pressures here are tame compared to the rest of the world.

A Global Epidemic



World food prices hit a record high in December, jumping above the 2008 food crisis levels and developing into an “alarming” situation, according to a report released earlier this month by the United Nations’ Food and Agriculture Organization (FAO).

The FAO’s Food Price Index, which tracks the prices of 55 food commodities, climbed for the sixth consecutive month to hit 214.7 points in December, its highest reading since the measure was first calculated in 1990. This beat the previous June 2008 record of 213.5 and is a 25% increase from December 2009.

Soaring prices for sugar, corn, grain, meat and oilseeds pushed the index to its new peak. Sugar recently hit a 30-year high, U.S. corn prices surged 52% last year, European wheat prices doubled and U.S. soybean prices rose 30%.

Unfavorable environmental conditions, such as floods in Australia, contributed to the surge in prices. But observers have pointed out the prices were rising long before these events culminated in what’s fast becoming a global crisis.

In parts of Australia, retail fruit prices jumped 17% between the September and December quarters last year and vegetable prices rose 15%.

Surging food prices in 2008 led to riots in more than 30 countries and this year have already touched off protests in Tunisia and Algeria.

European Central Bank President Jean-Claude Trichet earlier this week urged central bankers everywhere to ensure that higher food prices don’t get a foothold in the global economy. Indeed, Trichet emphasized overall inflation, rather than the core measures favored by the U.S. central bank.

“In the U.S., the Fed considers that core inflation is a good predictor for future headline inflation,” he said in an interview with the Wall Street Journal. But elsewhere around the world, “core inflation is not necessarily a good predictor.”

A Bountiful Harvest for Agricultural Stocks



While rising food prices are a burden for most Americans, they’re a boon for the U.S. agricultural industry.

U.S. farm income last year probably exceeded the 2004 record of $87.3 billion, and cropland values gained as much as 10%, Neil Harl, an agricultural economist at Iowa State University and former adviser to the governments of Ukraine and the Czech Republic, told the Pittsburgh Post-Gazette.

Higher prices will push U.S. agricultural exports up 16% to a record $126.5 billion this year, according to the Department of Agriculture.

The Department of Agriculture anticipates corn inventories will decline 5.5% this year to the lowest level in 15 years. Corn prices rose nearly 75% last year, catapulting shares of agribusiness companies and exchange-traded funds (ETFs).

The Teucrium Corn Fund (NYSE: CORN), which tracks the price fluctuations of corn, is up about 60% in the past year. And the Market Vectors Agribusiness ETF (NYSE: MOO), which offers broader exposure to the agricultural sector, is up 26%.

Companies that produce genetically engineered seeds that increase crop yields – like Monsanto Co. (NYSE: MON) and E.I. du Pont de Nemours & Co. (NYSE: DD) – also stand to gain.

Deere & Co. (NYSE: DE), the world’s largest farm equipment manufacturer, has seen its shares surge more than 66% in the past year on higher commodities prices.

But if you really want to profit from the agricultural boom, you should pick up the Money Map Report’s “2011 Investor’s Forecast,” which has already been delivered to subscribers. In it you’ll find an industrial-equipment maker that’s becoming the global leader of the worldwide agricultural boom and getting ready to blow past even Deere. If you’re not a Money Map subscriber you can sign up to receive the report by clicking here.

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Keynes You Can Believe In!

As most of my readers are aware, I am generally not a follower of the economic principles of John Maynard Keynes . However, I did come across some of his writings on inflation that I found insightful. He exhorted his reader on the economic and social damage caused when governments inflate the currency to help pay for unsustainable domestic and foreign adventures (welfare & warfare). According to Mr. Keynes, "profiteers" and "speculators" are not the cause of rising prices, rather they are the consequences of it.

In the case of the housing bubble, first the low interest rates and flood of loose credit generated by the Federal Reserve discouraged savings and encouraged prolific borrowing. And a combination of tax policies (deduction of interest paid on mortgages) and federal mandates (to increase home ownership in diverse communities) channeled this speculative energy towards the housing market. Once a price bubble is created, it becomes a self sustaining phenomena, growing as it attracts more and more capital and labor from productive segments of the economy, until a painful market correction occurs.

When the fiscal policies of regimes cause out of control inflation; speculation, hoarding, black markets and eventually bartering become the only means in which individuals can avoid losing their savings and livelihood. And when governments seek to curb inflation with price controls and heavy handed measures against "speculators", they only exacerbate the problems that they caused in the first place. And when prices are frozen by government mandates to ensure "affordability," shortages always ensue, Thankfully, for now, we are nowhere near that point.

In the coming year we should pay heed to Mr. Keynes' warnings about the adverse effects on foreign trade that occurs when a central bank debases the currency. Early in the Great Depression, trade wars erupted that heralded the near universal imposition of high tariffs, which impeded trade and economic recovery. If Mr. Keynes is correct, our government's conscience efforts to devalue the dollar may lead to a "devaluation war," which will weaken trade and the economic welfare of the United States and other nations. He must be rolling in his grave that epic fiscal irresponsibility and monetary mismanagement are being carried out in his name.

Keynes on Inflation

Excerpts from The Economic Consequences of the Peace by John Maynard Keynes, 1919. pp. 235-248.

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

In the latter stages of the war all the belligerent governments practiced, from necessity or incompetence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weakness the same malpractices. But further, the governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct on to a class known as "profiteers" the popular indignation against the more obvious consequences of their vicious methods.

These "profiteers" are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices. By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation, these governments are fast rendering impossible a continuance of the social and economic order of the 19th century. But they have no plan for replacing it....

The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent governments, unable or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance. In Russia and Austria-Hungary this process has reached a point where for the purposes of foreign trade the currency is practically valueless. The Polish mark can be bought for about [three cents] and the Austrian crown for less than [two cents], but they cannot be sold at all. The German mark is worth less than [four cents] on the exchanges....

But while these currencies enjoy a precarious value abroad, they have never entirely lost, not even in Russia, their purchasing power at home. A sentiment of trust in the legal money of the state is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover a part at least of its former value.... They do not apprehend that the real wealth, which this money might have stood for has been dissipated once and for all. This sentiment is supported by the various legal regulations with which the governments endeavor to control internal prices, and so to preserve some purchasing power for their legal tender....

The preservation of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labors for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbors as a favor, or relax his efforts in producing it.

A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but [also] leads finally to the waste and inefficiency of barter. If, however, a government refrains from regulation and allows matters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the fraud upon the public can be concealed no longer.

The effect on foreign trade of price-regulation and profiteer-hunting as cures for inflation is even worse. Whatever may be the case at home, the currency must soon reach its real level abroad, with the result that prices inside and outside the country lose their normal adjustment. The price of imported commodities, when converted at the current rate of exchange, is far in excess of the local price, so that many essential goods will not be imported at all by private agency, and must be provided by the government, which, in re-selling the goods below cost price, plunges thereby a little further into insolvency....

The note circulation of Germany is about 10 times what it was before the war. The value of the mark in terms of gold is about one-eighth of its former value....

It is a hazardous enterprise for a merchant or a manufacturer to purchase with a foreign credit material for which, when he has imported it or manufactured it, he will receive mark currency of a quite uncertain and possibly unrealizable value....

It may be the case, therefore, that a German merchant, careful of his future credit and reputation, who is actually offered a short-period credit in terms of sterling or dollars, may be reluctant and doubtful whether to accept it. He will owe sterling or dollars, but he will sell his product for marks, and his power, when the time comes, to turn these marks into the currency in which he has to repay his debt is entirely problematic. Business loses its genuine character and becomes no better than a speculation in the exchanges, the fluctuations in which entirely obliterate the normal profits of commerce....

Thus the menace of inflationism described above is not merely a product of the war, of which peace begins the cure. It is a continuing phenomenon of which the end is not yet in sight....

http://en.wikipedia.org/wiki/Keynes

http://en.wikipedia.org/wiki/Keynsian

The Austrian School of Economics

Pictured Above: The Great Ludwig Von Mises

I am not a strict adherent to the Austrian School of Economics and Ludwig Von Mises, because I recognize that their methodology poses some problems, however their explanation of the business cycle does seems to fit our current situation. As with any school of thought, it's worth exploring and integrating the more sound theoretical elements into your worldview and rejecting that which does not stand up to the tests of observation, experience and analysis.

Austrian economists focus on the amplifying, "wave-like" effects of the credit cycle as the primary cause of most business cycles. Austrian economists assert that inherently damaging and ineffective central bank policies are the predominant cause of most business cycles, as they tend to set "artificial" interest rates too low for too long, resulting in excessive credit creation, speculative "bubbles" and "artificially" low savings.[35]

According to the Austrian business cycle theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable "monetary boom" during which the "artificially stimulated" borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable.

Austrian economists argue that a correction or "credit crunch" – commonly called a "recession" or "bust" – occurs when credit creation cannot be sustained. They claim that the money supply suddenly and sharply contracts when markets finally "clear", causing resources to be reallocated back towards more efficient uses.

http://en.wikipedia.org/wiki/Ludwig_Von_Mises

http://en.wikipedia.org/wiki/Austrian_school

The Chinese & Russians Are Running!

The Chinese and Russians are starting to run away from the dollar. With our reckless spending financed by debt and the printing of dollars, I don't blame them. I predict that more nations will adopt similar policies.

China-Russia currency agreement further threatens U.S. dollar

By Hao Li November 24, 2010 12:30 PM EST

China and Russia have agreed to allow their currencies to trade against each other in spot inter-bank markets.

The motive is to "promote the bilateral trade between China and Russia, facilitate the cross-border trade settlement of [the yuan], and meet the needs of economic entities to reduce the conversion cost," according to Chinese officials.

This latest move -- a continuation in a series of efforts by both countries to move away from U.S. dollar usage in international trade -- further threatens the dollar's reserve currency status.

The dollar has this status because it is currently the currency of international trade.

For example, when Malaysia and Germany exchange goods, the transaction is often denominated in dollars. In particular, oil -- something that all modern economies need -- is denominated in U.S. dollars, so the currency is almost as indispensable as oil itself.

The dollar reserve currency status allows the U.S. to run up high deficits and have its debt be denominated in the U.S. dollar, which in turn enables it to print unlimited dollars and inflate its way out of debt. America, understandably, wants to protect these privileges.

In fact, some allege that the U.S. wants to protect this status so badly that it invaded Iraq because the country began selling oil in euros instead of dollars. Now, the U.S. is allegedly threatening Iran because of the country's desire to use euros or Russian rubles in oil transactions.

Meanwhile, China and Russia are gradually revolting against the U.S. dollar. This latest move to shift bilateral trade away from it is significant in itself because China-Russian trade -- previously denominated in dollars -- is currently around $40 billion per year. For Russia, trade with China is larger than trade with the U.S.

Moreover, as this policy extends to Russian exports of oil and natural gas to China, it threatens the global "petro-currency" status of the U.S. dollar.

According to the International Energy Agency, China is already the largest consumer of energy, although the U.S. is still the largest consumer of oil. However, China, now the largest automobile market in the world, is expected to rapidly increase oil consumption.

Russia is already the second biggest oil exporter and the biggest natural gas exporter in the world.

In other words, the growing importance of Russia and China in the global energy picture -- and their phasing out of dollar usage for trading energy commodities -- would marginalize the status of the dollar.


Russian ambitions against the dollar for energy exports go back to 2006. That year, former President Vladimir Putin made plans to set up a ruble-denominated oil and natural gas stock exchange in Russia.

"The ruble must become a more widespread means of international transactions. To this end, we need to open a stock exchange in Russia to trade in oil, gas, and other goods to be paid for with rubles…Our goods are traded on global markets. Why are they not traded in Russia," said Putin, according to RIA Novosti.

For China, it is promoting the use of yuan as a trade settlement currency in Asia. Recently, it allowed its currency to trade against the Malaysian ringgit. Just like the deal with Russia, the purpose of that agreement was to "promote bilateral trade between China and Malaysia and facilitate using the yuan to settle cross-border trade."

Trade is the major reason for the demand of foreign currencies in the first place. So as countries like China and Russia phase out the usage of U.S. dollars for international trade -- including but not limited to oil trade -- its status as the world's reserve currency will continue to slide.

Email Hao Li at hao.li@IBTimes.com

http://www.ibtimes.com/articles/85424/20101124/china-russia-drop-dollar.htm

Distribution of Wealth (Part VI)

One factor that I have neglected to mention is inflation.

Over time wages have risen, but the problem for many workers is that wages increases have not kept up with the rise in prices. Milton Friedman and many other economist are correct that the burden of inflation usually falls heaviest on the poor and middle class. Furthermore, inflation discourages savings and production and encourages people to place their capital in high return, speculative ventures, all of which contributes to the increasingly unequal distribution of wealth.

Without a doubt the main culprit of inflation is the federal government via the expansive monetary policy it uses to fund its massive growth.

Inflation is on the Way

Children of the Weimar Republic stacking

Deutsche Marks rendered worthless through hyper-inflation.

Scroll down to view Glenn Beck's video in which he correctly points out that the Fed is greatly increasing the money supply, which will herald future inflation.

We will not see inflation for the time being, because of the drop in demand for goods and services related to the economic downturn. But, I am confident that Obama has laid the monetary foundation for major post-recession inflation.

Inflation not only is economically damaging, but it engenders political and social turmoil. In fact, most modern revolutions, from the bolsheviks in Russia, to the nazis in Germany and the coup against Allende, were preceded by acute inflation.

http://www.youtube.com/watch?v=lNS8IY_Td14

Let's Counterfeit!

Economists are universally opposed to counterfeiting because it degrades the value and decreases confidence in a currency and causes inflation through the increase of the money supply. And history has shown that inflation is harmful because it erodes the purchasing power primarily of the working class and erodes any incentive to save and invest money. But, our savior Obama has decided to continue Bush's expansion of the money supply via the printing press, to help pay for his endless expansion of government programs.

So, I say if counterfeiting is good enough for our savior, it's good enough for us. Why bother expanding and improving production and human capital, when each American can end the recession by creating and spending counterfeit money. And when massive inflation occurs we can buy wheelbarrows to cart around money, like they do in Zimbabwe, which will of course stimulate our wheelbarrow industry. So write to Barack Obama and Ben Bernanke asking them to send you a printing press, so you can do your part to help foster change we can believe in!

http://www.brookesnews.com/082912obamanomics.html

http://www.theaustralian.news.com.au/story/0,25197,24949763-7583,00.html