The Inflation Picture Is Not Good

Yesterday on my blog I wrote a series of articles on inflation. The bottom line is the inflation picture is not that good right now. This has incredibly important implications for Fed policy. If the Fed lowers rates too much they run the risk of stoking inflationary pressures. That means that on the flip side of the current economic mess we run the risk of having to increase rates too quickly to deal with inflation. That move will slowdown the then underway expansion.

In addition, we're in a period of declining purchasing power for the average consumer. Note that energy and food inflation are increasing. As the cost of necessities increases more and more people will have less and less money available after buying all of their monthly necessities.

As the information below indicates, inflation is a problem. And it is growing.

I've written this title a bunch over the last few months, largely in response to a story of a few commodities hitting new highs. However, I haven't looked at a ton of charts and compiled them into a master list. So here is that list.

First I went to Futures Trading Charts. Then I looked at their futures charts for agricultural and energy commodities. I found 18 charts that show major price moves. All of them are listed below.

If this were one commodity I would dismiss it as a commodity specific price disruption. However, we're looking at major league price spikes across the spectrum of goods. That's a huge deal and it indicates a fundamental development in the markets. I stand by my standard explanation 101: with India's and China's standard of living going up, it's only natural the demand curve gets moved to the right. That means increasing prices.

I eyeballed the gains, so they might be off by a few percentage points either way but you get the rough idea.

Aluminum

Copper

Platinum

Silver

Gold

Canola

Cocoa

Coffee

Corn

Oats

Rough Rice

Soybean Meal

Soybeans

Wheat

Brent Crude Oil

Heating Oil

Light Crude

Propane

Now for the final question. Here is a graph from Martin Capital of Productivity.

Are the gains on this chart enough to absorb all of the cost increases demonstrated in the charts above?

Finally, given what the charts above show (who are you gonna believe -- government statistics or your lyin' eyes?) is this really a good environment to start lowering rates?

China's consumer prices surged by 7.1% in January, exacerbating the dilemma for policymakers who face both weakening global growth and a domestic economy still at risk of overheating.

The acceleration in inflation, up from 6.5% in December, came after heavy snowstorms in late January froze power grids and shut down road and rail transportation across much of southern and central China. The severe shortages of daily necessities that followed helped push the monthly inflation reading to its highest level since September 1996. And the snow's impact on prices is likely to be felt further in coming months, as it killed farm animals and damaged crops across a large part of the country.

The continued price increases, which have been gaining speed since early 2007, make it more difficult for the government to stimulate the economy to counter the recent financial-market turmoil and economic slowdown in the U.S. and Europe. China's inflation is still confined almost entirely to food -- where prices rose 18.2% in January -- but officials are concerned those increases could feed into bigger price spirals that would be much more difficult to contain.

All China has to do is go to a core inflation policy and everything will be OK.

China's producer prices rose last month at their fastest rate in more than three years, adding to the inflationary pressures confronting Beijing policy makers.

Producer prices rose 6.1% in January from the year earlier, data issued by the National Bureau of Statistics showed yesterday. The figure was up from 5.4% in December and was the highest since December 2004.

Curbing inflation and excess liquidity remain the focus of China's economic policy as producer prices, along with other recent economic data, suggest that the impact of the global economic slowdown hasn't been obvious in China so far, said Tao Wang, a Beijing-based economist at Bank of America Corp.

"The growing inflationary pressure, especially with buoyant export and money-supply growth, points to the necessity for China to continue its tight monetary policy," she said.

It's not just a US problem now, is it?

Oh yeah in case you missed this on Friday

The January increase in overall imports resumed the upward trend of the past year after a 0.2 percent decrease in December. The index, which had risen 3.1 percent in November and 1.5 percent in October, is up 13.7 percent over the past 12 months, the largest year-over-year increase since the index was first published in September 1982.

But we should be lowering rates right now....

Above is a long-term chart of the dollar. Notice the chart is in a clear bear market pattern of lower lows and lower highs. Remember that most commodities are priced in dollars, so as the dollar drops in value the value of these commodities by definition increases.

Above is a daily chart of the dollar. There is some good news here. Notice the dollar is consolidating above its recent lows, indicating traders have bid up the dollar a bit. Also note the simple moving averages are bunched, indicating a lack of direction. This is better than all the SMAs moving lower. It looks as though traders are wondering of the dollar is fairly priced right now, or whether it was fallen enough and should be higher.

Finally, above is a chart of the percentage increase from the previous year in MZM which is defined as:

A measure of the liquid money supply within an economy. MZM represents all money in M2 less the time deposits, plus all money market funds.

That's a big damn increase.

Finally, consider this chart from Shadow Stats:

The CPI chart on the home page [as reprinted above] reflects our estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate Data Series tab here [the chart above], reflects the CPI as if it were calculated using the methodologies in place in 1980. Further background on the Alternate CPI and Ongoing M3 series is available in the Archives in the August 2006 SGS newsletter.