In planning my upcoming trips to China and Europe, I was amazed at how much higher prices are now compared with last year. Airfare, hotel and car service prices — all have surged since I booked my trips last year.
For example, the cost of hotel rooms and other services in Shanghai is up more than 50% just in the past two years, on par with New York City. Prices have gone up considerably throughout Europe as well. It is often less expensive to buy Italian suits, Swiss watches, and German cars in Los Angeles than their respective countries of origin.
Compared with Europe and Asia, the United States is right now the best country for good deals. But even in America, currently one of the best locations for consumers to go shopping, prices will not stay low forever.
Inflation is making a comeback in the United States, and there are three big reasons why it will accelerate in the coming months:
1. Weak U.S. Dollar
The dollar has lost ground against every major currency in the past 12 months. Even with the European debt crisis of the past year, the euro is now higher against the dollar than the pre-crisis level. The dollar has also lost between 4% and 12% against various Asian currencies during the past year.
The greenback is gradually losing its traditional status as a safe haven and global reserve currency. In the ongoing Middle East unrest, flight capital from the region poured into the Swiss franc instead of the US dollar, the traditional safe haven, driving the franc up to an all-time high.
In addition, the Fed under “Helicopter” Ben Bernanke is determined to reflate the economy by flooding the world with dollars. This will further devalue the worth of our paper money.
2. High Commodity Prices
With oil prices above $100 again, high commodity prices are back in the spotlight. Yet many commodities — and commodity ETFs such as the SPDR Gold Trust (NYSE: GLD), iShares Silver Trust (NYSE: SLV), iPath DJ-UBS Copper Total Return Sub-Index ETN (NYSE: JJC), and iPath DJ-UBS Cotton Total Return Sub-Index ETN (NYSE: BAL), just to name a few — are already much higher than they were before the global financial crisis.
For instance, both gold and copper are already 50% higher than they were three years ago. Higher commodity prices lead to high raw-material prices, which is a significant component of final goods prices.
Some investors may think that a falling U.S. dollar and surging commodity prices are nothing new. After all, except for housing prices, we saw these same trends play out from 2004 to 2008 without a major impact on consumer inflation. But it is different this time — because of China.