There has been a lot of talk about unemployment lately, as a number of recent jobs reports have been disappointing. At the same time, the media remains focused on the looming Aug. 2 deadline to raise the debt ceiling. That has pushed one of the most pressing economic issues to the back seat. That issue is, of course, inflation.
Yes, Americans recently have gotten respite at the pump. The June Consumer Price Index report, or CPI, saw a 4.4% decline in the overall energy index to mark the largest drop since December 2008. But a price rollback from nearly $4 nationwide in May to around $3.60 today doesn’t mean cheap gas is here to stay. And as we all know, one or two reports shouldn’t make us forget about the long-term trends that have been clear for quite some time.
Investors need to keep an eye on inflationary pressures for many reasons. Rising costs cut into margins for many industries – whether it be fuel costs for airlines or food costs for restaurants or materials costs for manufacturers. Also, rising inflation means consumer spending could be increasingly under pressure in the months ahead as wages can’t keep up with rising costs.
And, of course, it’s important for all Americans to be proactive with their savings and retirement plans in an inflationary environment. A 1.2% “high-yield” savings account is actually a money-losing investment if the annualized rate of inflation hits 1.3% or higher.
The Federal Reserve and many politicians continue to insist that inflation is insubstantial. Maybe. But there also are signs it’s a growing problem – and five big reasons inflation is on the march:
Record Gold Prices
It’s obvious, but I have to say it anyway. Gold prices are now above $1,600 per ounce, marking a 36% year-over-year increase, and appear to be moving even higher. These record gold prices are partially because of the fear investors have about the economy and government spending problems worldwide. But record gold also has been caused by buying pressure as investors look to hedge their bets against inflation.
Since the end of World War II, the five years in which the U.S. inflation was at its highest were 1946, 1974, 1975, 1979 and 1980. During those five years, the average annual real return on stocks, as measured by the Dow, was -12% – with 1974 marking the fifth-worst year for the index on record with a -27% loss. By contrast, the average return on gold for those years was over 130%.
Gold’s record run is a pretty good tell that inflation is heating up, too.
And don’t forget that other previous metal, silver – it’s been on a tear, too. Silver recently topped $40 per ounce, more than doubling year-ago pricing around $18 an ounce.
The yield on the seven-year Treasury Inflation Protected Securities bonds dropped into negative territory again this week. This is very close to an all-time low yield, approaching the -0.12% yields we saw on TIPS last October.
As the name implies, Treasury Inflation Protected Securities, or TIPS, are investments whose par values rise with inflation. For instance, if inflation runs at 1% for the next six months, at the end of 2011 a $1,000 investment in TIPS would be worth $1,010 – 1% above the purchase price.
What’s of particular note isn’t that investors are banking on inflation, but that they are so confident these TIPS will rise that they are paying Uncle Sam to own the bonds. A negative yield means investors must remit semiannual payments instead of receiving regular checks from the government like they do with conventional bonds. In short, those who buy TIPS with a negative yield are expecting inflation to be severe enough to not just cover their payments to the Treasury, but to deliver a tidy profit on top of that.
The fact that investors are willing to dish out cash twice a year to hold an investment that is pegged to inflation rather than settle for a fixed payday of 2% or 3% in conventional Treasury bonds shows how confident they are that inflation will run wild.
Consumer Prices Rise in U.S.
Back in May, I wrote an article highlighting nine signs that inflation is crushing America. As no surprise to anyone who frequents the grocery store, many items supporting my argument included consumer goods that are skyrocketing in price.
Well, two months later, that list of rising consumer products is even longer.
The average price of coffee has risen by more than 50% since early 2010. And third-party vendors have also hiked prices in kind – consider Starbucks (NASDAQ:SBUX), which recently announced a 17% hike in the price of its packaged coffee to compensate for the steep increase in Arabica beans.
June milk prices were up 3% from May and up 31% from June 2010, according to the National Agricultural Statistics Service.
Some of these price hikes are big. Some are small. But make no mistake – just about everything at your local store is going up, up, up.