Get Ready: Inflation Is Coming

by Anthony Mirhaydari | April 29, 2014 4:57 pm

Economists can talk about annualized inflation rate or month-over-month changes in the Producer Price Index all they want. But these are merely abstract measurements of what every regular American experiences every day: the pain of higher prices.

Most of the time, it’s a slow, creeping erosion of the purchasing power of the U.S. dollar that only becomes shocking across the long arc of time. Like when the suits in Mad Men get jealous over a $300-a-month salary. But sometimes, like when an ongoing orange crop failure pushed the price of an 89-ounce jug of Tropicana at my local grocery store to nearly $9 this week, the pain is quick and acute.

Especially when you consider that the median full-time inflation-adjusted earnings for a man peaked in the 1970s and have been stagnant ever since.

No wonder one in seven Americans are on food stamps.

But here’s the problem: The evidence suggests the pinch on pocketbooks is about to get worse as inflation — led by food prices and housing costs — heats up again after a two year reprieve amid a lack of wage growth. Not only will that cause problems for consumers, but it will complicate the Federal Reserve’s stimulus efforts as well.

Price pressures are clearly building. The core Producer Price Index jumped in March over February at the fastest rate since 2011, amid the inflation scare driven by the Arab Spring and its impact on crude oil prices. The increase was broad-based, with services prices rebounding.

inflation consumer price index
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The Consumer Price Index jumped to a 1.5% annualized rate in March — nearing the Fed’s 2% target — due to a big jump in food prices as crops from oranges to coffee suffer from low yields while beef prices are rising on the smallest cattle herd in generations. The problem is poised to get worse as a paralyzing drought in California[1] — a key producer of a variety of fruits, nuts, and vegetables — worsens. Drought conditions are now plaguing Texas as well as high plains states including Kansas and Nebraska.

Moreover, one-third of consumer inflation is driven by shelter costs. A drop in the measure back in 2010 is what spurred the Fed to launch another round of bond buying stimulus, dubbed “QE2” at the time. And after holding near a 2% annual inflation rate (which is where the Fed wants it), the measure is pushing toward the 3% level as the recovery in home prices filters into the government’s inflation calculations.

This would all be fine if wages were growing faster than prices, but they aren’t: The average hourly earnings of production and non-supervisory employees is expanding at around a 2.5% annual rate, well below the 4%-plus level seen at the peak of the last bull market and economic expansion in 2006 and 2007.

Should inflation continue to rise into the summer, the economy will suffer as consumers are forced to pull back. And the stock market will suffer with all eyes still on the flow of cheap-money stimulus from the Federal Reserve. Higher prices will limit Fed chairman Janet Yellen’s ability to hold off on short-term interest rate hikes until the tail end of 2015, as she desires.

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The specter of higher prices could be why investors are starting to move into downtrodden gold and silver mining stocks, such as Newmont Mining (NEM[2]). I’ve recommended call option positions in NEM to my Edge Letter Pro clients[3].

Anthony Mirhaydari is founder of the Edge[4] and Edge Pro[5] investment advisory newsletters, as well as Mirhaydari Capital Management[6], a registered investment advisory firm.

  1. a paralyzing drought in California:
  2. NEM:
  3. Edge Letter Pro clients:
  4. Edge:
  5. Edge Pro:
  6. Mirhaydari Capital Management:

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