Seven Reasons Inflation Won't Vanish

Yes, I heard Fed Chairman Ben Bernanke say recently that the inflationary forces will "moderate" in the months ahead. We also realize that one of the reasons that is unlikely has something to do with greed and the reality of human nature.

Here are 7 more reasons that inflation isn't going away any time soon.

1. Inflation is firmly entrenched already. Give us a break Mr. Bernanke and Mr. Paulson! The "real world" CPI has inflation (the real "cost of living" at 9%), and it's rising at the fastest rate in nearly four decades, according to www.ShadowStats.com.
2. As reported last month, the Producer Price Index [PPI], which measures prices at the factory door, jumped 1.2% in July and a shocking 9.8% during the past year. This is the highest annual increase in the last 27 years according to Keith Fitz-Gerald, the Investment Director of The Money Map Report.
3. The Labor Department also stated that average weekly earnings declined 3.1% in July from the year before. This is the biggest year-over-year decline since November 1990. This along with the steady depreciation of the purchasing power of the currency, which is the real definition of inflation, and we all feel that our money and earnings don't go as far.
4. The Labor Dept. also stated that consumer prices jumped 0.8% in July, putting them on track for a 5.6% annualized increase. That is the fastest pace in 17 years.
5. More of the Fed Governors appearing to be pushing for higher interest rates and are turning "hawkish." If energy and commodity prices resume their upward trajectory at a time when the credit crisis, which hasn't begun to be solved yet, fires up again, we might all see a tug-of-war at the Fed between those who want to lower rates to save the economy (i.e. Bernanke) and those who know how serious inflation is right here, right now.
6. According to Bloomberg.com, the Reuters/Jeffries CRB Index gained more than 29% through June 27, the "best" first half of a year for commodities since 1973 (when inflation was so bad Nixon slapped price controls on food). Even after recent declines, global consumption patterns are headed sharply higher, suggesting we'll see additional inflationary pressures because of diminished supply.
7. And last but not least, even if the Fed's Bernanke doesn't raise interest rates, investing guru Jim Rogers recently told Keith Fitz-Gerald that the chances are "that the markets will do it for him," which will make the cost of borrowing go higher.

Yes, I know oil has corrected down to $103 and natural gas is down to $7.15, but this is happening partly in the face of hedge fund liquidations and whatever manipulations and "window-trimming" that goes on before a presidential election in the U.S.

The beltway boys in Washington D.C. want everything to look "hunky-dory" right now. It is a bit of damage control in the face of grim economic news like rising unemployment. They know the real measure of inflation has been looking ominous for some time now.

Now is a good time to keep your eyes on the ETF Powershares DB Commodity Index Tracking Fund (DBC) as well as the the Market Vectors Gold Miners ETF (GDX). You might not see them this low a few months from now, when, magically, inflation rears its ugly head once again.

It is also a great time to consider the iShares Lehman TIPS Bond ETF (TIP). TIPS have a low correlation to stock and bonds. Treasury Inflation Protected Securities are essentially Treasury bonds that hedge against inflation.

You get an interest payment every six months, just like with the old-fashioned T-note. But your principal increases each year by the amount of the consumer price index. That means the amount you’re paid in interest also increases by the amount of inflation.

The interest you receive is exempt from state and local (but not federal) income taxes. And like other Treasuries, your investment is backed by the full faith and credit of the U.S. government.

You can get these bonds directly from the U.S. government or from virtually any broker. But members often tell me they have trouble buying them or even getting a price quote. That is why many prefer to use the ETF TIP, which some experts says is priced positively right now.

Comments

[Jimbo:]

I bailed out of TIPS earlier this year. The "adjustment" made in the price of TIPS fails to compensate for actual inflation and you have to pay capital gains taxes on the "adjustment". A lousy deal!

2008 Sep 09 12:19 PM

[ProHFAnalyst:]

I agree with many of your stats, however, the Fed's statement that inflation will moderate is predicated on one simple and unavoidable fact: when there is a recession, demand plummets, and hence there is an oversupply of all goods for a little while until production also adjusts downwards. So in the end, the argument boils down to this: if there is a big recession, then inlfation will moderate, if not, then inflation will keep chugging along.

2008 Sep 09 12:25 PM

[Marc Courtenay:]

Jimbo's comments are appreciated and should be considered by potential TIPS investors. The words of ProHFAnalyst sound prophetic today as the commodity sector is hammered down to lows we haven't seen in quite awhile. Right now this sell-off in precious metals and energy has us all focused on deflationary forces, and that might be the persistent theme for awhile...at least until Mr. Bernanke launches his helicopters and begins dropping more paper money to save the day.

2008 Sep 09 02:40 PM

[JasonC:]

Weak take home pay in nominal terms is not what entrenched inflation looks like. Real entrenched inflation sees wages rise at double digit rates and barely keep up with prices even while doing so. There isn't the slightest sign of such wage inflation. And credit sources are systematically disappearing for already overextended consumers. As a result, there isn't the slightest chance that all these huge price increases will stick. Instead they will simply destroy demand, just as we saw with oil. It is a bubble. Everyone and his brother is predicting the same inflationary brainstorm, but someone forgot to tell the Fed, and M1 is not moving. Hasn't in 3 1/2 years. There are not more dollars chasing the same quantity of goods. There aren't any more dollars and they are doing less chasing, not more, as everyone hunkers down into cash investments. In a real inflation everyone is clamouring to get *out* of cash investments - there isn't the slightest sign of that.

The inflationary storyline is pure ideological drivel trying to wish itself into existence. It won't happen.

2008 Sep 09 02:41 PM

[dlaw:]

HAHAHAHAHA!

Oh, this is funny.

The biggest deflationary crisis in three generations and the Ron Paulites and right-wing ideologues are still talking inflation.

How long can you be this wrong and not see it?

Gold is headed, not *to*, but *THROUGH* $700. Why? Because gold is not money, it's a commodity that is traded in dollars and the value of the dollar is exploding as the number of dollars extant implodes.

But keep talking the inflation talk.

2008 Sep 09 03:42 PM

[Socialism c...:]

@dlaw: right wing ideologues?? who are you calling an ideologue - the way you apparently disdain the right...its clear who is the ideologue! back to the economy though: deflation is only a function of money supply, and last i checked, the Fed has not yet raised rates...in fact, Fed futures are starting to point at another cut. meanwhile, the dollar is strengthening *only* because the rest of the world has finally caught the contagion...*not* because the U.S. economy has bottomed! stagflation is alive and well once the rate of decline in the world levels off and we're all riding bottoms together!

2008 Sep 09 06:17 PM

[silver-bullet:]

Prices of Gold and Silver are artificially suppressed.... Which means every time I buy silver and gold, I close my eyes, smile and thank whoever is suppressing precious metals prices.

Thank you anonymous suppressor!

2008 Sep 09 10:18 PM

[silver-bullet:]

What the fed is trying to do is pretty obvious:

PREVENT A RECESSION FROM HAPPENING BEFORE THE COMING ELECTION.

After the election... that's another story. I think inflation will accelerate and the government will officially acknowledge the recession. By intervening in recent bailouts, the fed has seriously compromised the free market economy.

2008 Sep 09 10:25 PM

[Tyler J:]

TIPS? Are you kidding me! Just another money making machine for the US gov't to steal our wealth! Buying Gold and SILVER and Shorting the US Dollar is your best protection!

2008 Sep 10 12:03 AM

[bearfund:]

If I can buy gold for $600, I'll give you my last dollar for another 1/600th of an ounce. Point is, the Fed will cut further and Ben's helicopter speech may well turn into literal truth before this is over. Do not underestimate the indebted's desire to print. Whether prices of good X or service Y rise in dollar terms is irrelevant. Gold is my functional unit of value and in gold I trust. Dollars are paper assets and therefore by definition somewhat speculative. You may win, you may lose, but mostly you will pay.

2008 Sep 10 12:37 AM

[Ag Enemy of...:]

This is ignorance at its finest......"Because gold is not money, it's a commodity that is traded in dollars and the value of the dollar is exploding as the number of dollars extant implodes. "

FIAT is FIAT and will always be FIAT...until it is no more...history may not exactly repeat...but it rhymes...

Unknown

2008 Sep 10 02:18 AM

[Balderdash:]

In response to deflationists:

Consider the following economy. Person A, Person B, and a bank.

Time 1: Bank has $0, Person A has $100 and a sandwich, Person B has $0 but a decent credit rating.

Time 2: Person A deposits $100 in Bank. Person B borrows $100 from Bank and buys sandwich from A with $100 and eats it. Now Person A has $100 plus $100 demand deposit in the bank, Person B has nothing, and the bank has a loan to B.

Time 3: Person A deposits $100 in Bank for a total of $200 deposited. Bank has $100 plus a loan to B. B has nothing. B defaults on loan because he has no job. The world is one sandwich poorer.

Time 4: Ben Bernanke gives Bank $100 for nothing so Person A gets his deposits back. Now Person A has $200, Bank $0, and Person B $0.
No sandwiches.

Net result? Twice the money and no sandwiches. Lesson? Inflation doesn't need wage growth and it isn't an equal opportunity virus. The bankers are getting free money and we're running out of sandwiches.

2008 Sep 10 03:17 AM

[WILLTK:]

1. Dollar is being manipulated - pre-election ploy
2. Hedges are selling selling selling to cover Mortgage bond losses - soon to be buying buying again.
3. Poster sez deflation - he must be a hermit - hasn't bought a thing in 2 yrs . PRICES at everyplace I go are up up up - i.e- at local restaurant - two eggs ,toast , links and fried taters and coffee $7.80 , was 6.50 ,6 months ago - no there is no inflation - here have another cup of koolaid . We are also under the largest socialist duping this country has ever seen . Again have another cup of thier koolaid - and hope your hallucinations last another decade .
Bill

2008 Sep 12 04:21 AM

[Delojozafado:]

We certainly do have inflation. One of the best investments in my IRA through this whole one year long market decline has been the closed end fund WIA. TIPs at a discount. It still yields about 5.5%. CEFs are beginnning slowly to come over from the dark side. That is morph into ETFs when this happens the discount to NAV all but disappears. I am also invested in the PMX in my non sheltered accounts. Nearly 6% yield for an investment free of Federal taxes. This is something that will work best if you have a low commission broker and slowly over the next few years take partial positions in. States like Calf and NJ that could never balance their budgets in good economic times are now paying a 1.25% premium to US treasury notes of similar durations. PMX is a long term bond portfolio. I balance it off with my larger position in FLTMX a very sound Med term tax exempt bond fund. For the bold there is the BAC-PrE which has a default rate (payments can not be reduced below the minimum rate) and that has an adjustable dividend rate that is tied to LIBOR.

2008 Sep 14 06:11 AM