by Jack Ohman
'I would not be surprised to see inflation of 15-20% in the not-too-distant future.'
By By Larry Edelson
Money and Markets
JUPITER, (Florida)
Almost all the commodities I follow — food, precious metals, energy, even water — are inflating like crazy.
Besides the usual suspects that I spend the most time analyzing — gold and oil — take a look at what else is happening...
In the past year, peanut butter is up 9%, dairy prices are up 12%, eggs have shot up more than 30%, and flour is up an astounding 46%! In just the last two weeks, the price of cocoa is up almost 7% and sugar is up about 6.2%!
Agricultural commodity prices are exploding. Corn prices have soared 58% since the first of the year, jumping 17% in the last month alone, and reached a new high last week.
Wheat prices are up almost 13% so far this month. And soybean prices are on a tear, UP 18% in barely four weeks. As a result, a loaf of bread is up 17%.
Transportation costs are up 8.1% over the 12 months ending in May. Gas prices were up 5.2% in May, 21% compared to a year earlier. And airline tickets last month were up 3.2%, their largest gain in more than six years.
Heck, even the cost of a bag of potato chips I bought yesterday is up 10% in a year.
This tells you inflation is already on a roll. But you already know this. Because like me, you go to the grocery store, you go to the gas pump, and you travel. The real shocker is ...
WHY Prices Are Surging Now - And Inevitably Headed Even Higher!
First, there's soaring demand from 3 BILLION new consumers. I may sound like a broken record here, but almost every analyst I know underestimates the impact of 3 billion new consumers in India, Russia, China, and the rest of Asia.
There will be NO stopping them as they emerge from dark and backward economies, into the 21st century. There will be price pullbacks, naturally, but there is no stopping the needs, wants and desires of 3 billion people, nearly half the world's population.
Case in point, China ... where ...
May's retail sales soared $126 billion — or 21.6% — the second-fastest rate on record and 21 times greater than retail sales growth in the U.S.
Auto sales jumped 32% from a year earlier.
Personal incomes jumped 11.5% in the first quarter.
Oil imports surged 25% in May alone ... on top of a 22% jump in April!
Much the same can be said for India, Russia and Southeast Asia.
Second, it now takes nearly $138 to buy a barrel of oil. No matter where you live, everybody is experiencing record high energy prices that are set to move even higher.
Oil and petrochemicals are major components of virtually everything manufactured. So when their price rises, it drives up costs in just about every industry in the world.
Oil and petrochemicals are found in rubber tires, gloves, shoes ... in the manufacturing process for clothing items, medicines, in every plastic made, even in cosmetics. It is the one commodity that is almost universally used in products from A to Z.
That's just oil's use in products. That doesn't even take into account the cost to heat and cool our homes, run our cars, lawnmowers, and more. Oil is used EVERYWHERE.
So don't let anyone convince you otherwise: Rising oil prices are inflationary. Period. They are driving the prices of just about everything much higher.
And if oil and energy prices come down a bit? Well don't count on any relief in overall price levels. Any pullback in energy costs is likely to be nothing more than temporary and not enough to offset growing demand.
Third, a falling U.S. dollar. All this demand is occurring at a time when Washington wants a weaker dollar to try and chip away at the mountain of bad debts in the U.S. economy.
The combination of soaring demand from 3 billion new players on the world stage, record-high oil prices and a plunging U.S. dollar has never happened before and is more than throwing kerosene on a fire: It's like setting off a nuclear bomb on top of another nuclear bomb.
They are the most powerful, inflationary forces ever seen in the history of this planet. Period.
And if that's not enough ...
Fourth, the Earth is caving in under the weight of the demand, and as a result, supplies of most natural resources are woefully — and in some cases almost permanently — short.
Again, burgeoning demand is the main reason. The weak dollar is another. And a whole bunch of miscalculations made by politicians and corporations is yet a third.
Bureaucrats underestimated the situation, and have developed reckless policies that have caused the "law of unintended consequences" to kick in. Prime example: Corn ethanol, and its impact on pushing food prices higher.
Companies, on the other hand, also hugely underestimated the need for growing their production capacity in natural resources, and under invested in infrastructure, didn't build new refineries, or searched enough for new oil finds or mines.
Companies, on the other hand, also hugely underestimated the need for growing their production capacity in natural resources, and under invested in infrastructure, didn't build new refineries, or searched enough for new oil finds or mines.
End result: Dwindling supplies in most natural resources, with little or no prospects of ever catching up.
Fifth, government hoodwinking that is about to backfire. Some months ago I wrote about how Washington's manipulation of the CPI would eventually backfire, and cause the public to wake up to inflation, setting off a cycle of buying now in anticipation of yet higher prices to come, pushing inflation still higher.
That's starting to happen now. Not just in the U.S., but all over the world, where citizens are finally calling their officials for what they really are: Emperors with no clothes.
Bottom Line: Inflation is already here, it's going to move substantially higher in the months ahead, and the government's CPI won't pick up more than a small fraction of the rise.
Here's what I see coming next ...
Initially, governments will try to regulate commodity prices, but their efforts will fail, and the end result will push prices even higher.
This is what I call the "interference phase", where authorities blame price rises on speculators, on poor regulation, and other outside forces.
But mark my words, they are dead wrong. Blaming speculators will just reduce liquidity in the markets. Reduced liquidity means higher costs of doing business as do new regulatory burdens.
The major trends that are in motion are the result of the forces I spelled out above, and any finger-pointing or regulation will merely serve to exacerbate the trends, not change them.
As a result, productivity levels will fall. During the late 1990s and even into the first few years of the millennia, labor productivity levels were rapidly improving because of the new technologies in computers, robotics, the Internet, and more. For every dollar spent on labor, the amount of goods and services produced was rising substantially. This helped keep inflation at bay.
But now, productivity measures are leveling off and even beginning to show signs of falling. If this continues, as I expect it will, labor costs as a percentage of the final cost of products and services will begin to rise substantially, adding more fuel to the inflationary fires.
This should not be underestimated. Rising labor costs — even in the form of falling productivity — are a major source of inflation. And when coupled with rising energy prices, the mix can make for some very powerful rocket fuel to propel inflation.
In the end, more and more companies will simply pass on their increased costs to consumers. You just saw it when I told you about the price of a bag of potato chips that jumped 10% in the last year. And in the other examples I gave you at the outset.
But that's just a few products here and there. As inflation rises, more and more companies will be forced to pass on their increased costs.
Retail-price inflation will take off to the upside. I would not be surprised to see inflation of 15-20% in the not-too-distant future.
What should you be doing right now?
Stick with assets that benefit the most in an inflationary environment — ones that I've suggested you consider in previous issues. To review ...
I consider gold your best hedge against rising inflation and a falling dollar.
I also think you should look at select natural resources and the companies that control in-demand commodities ... the very same commodities that are also rising in value as the dollar plunges. These include oil ... gas ... iron ... steel ... aluminum ... wheat ... corn ... soybeans ... sugar ... coffee ... even water!
This investment news is brought to you by Money and Markets. Money and Markets is an investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit www.moneyandmarkets.com.
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