Just because inflation readings are currently low does not mean that inflation is not present in the system. To understand my viewpoint in this regard, let's first examine some of the more common readings of inflation.
- Consumer Price Index - measures prices of a selection of goods and services purchased by a typical consumer.
- Core Price Index - the most well know measure of inflation that excludes food and energy prices, due to their volatile nature.
- Producer Price Index - measures average changes in prices received by domestic producers for their output. Additionally, the Producer price index measures the pressure being put on producers by the costs of their raw materials.
Most of the mainstream media outlets, in addition to the Federal Reserve itself, focus on core inflation readings. I think that this approach could be very misleading because mainstream America does not have the luxury of excluding food and energy from their everyday lives. Hence, if food and energy prices are rising (and not being picked up by the core inflation readings), Americans are likely to have less disposable income, unless commensurate increases in wages occur to offset the price increases.
Less disposable income generally leads to lower overall consumer sentiment/confidence, which translates into lower consumer spending. Lower levels of consumer spending could prove to be a major headwind to this economic recovery as consumer spending accounts for more than 70% of U.S. Gross Domestic Product (OTC:GDP) growth.
The question then becomes to what extent have energy and food prices risen thus far in 2012? To answer these types of commodity-oriented questions, I often turn to the exchange-traded product (NYSE:ETP) universe. Below, is a selected listing of agriculture and energy ETPs and their respective 2012 year-to-date (YTD) return from ETF Database.
|Ticker||Name||2012 YTD Return%|
|CORN||Teucrium Corn Fund||-3.53%|
|SOYB||Teucrium Soybean Fund||+5.89%|
|WEET||iPath Pure Beta Grains||+2.70%|
|WEAT||Teucrium Wheat Fund||-7.19%|
|FUD||UBS E-TRACS CMCI Food Total Ret||+2.73%|
|Ticker||Name||2012 YTD Return%|
|USO||United States Oil Fund||+6.45%|
|UGA||United States Gasoline Fund||+19.29%|
|UNG||United States Natural Gas Fund||-29.10%|
|UHN||United States Heating Oil Fund||+11.38%|
|DBE||PowerShares DB Energy Fund||+11.66%|
Please Note: Data sourced from ETFdb as of March 19, 2012. Past performance is not an indication of future results.
A review of these selected data points would suggest the price inflation is occurring thus far in 2012, although to a much greater extent in energy than agriculture. Similar price pressures are being experienced in the industrial (i.e. aluminum and copper) and precious metals (i.e. gold and silver) markets.
I still contend that inflation is anxiously waiting in the wings (though not an immediate concern) despite the pullback in several commodity prices that occurred late in 2011 and the contentions by many market analysts that certain commodities may be due for a further correction.
As a result, investors may want to consider reducing allocations to commodities in their investment portfolios for 2012 from the levels they had set in 2011, but I would not recommend retreating entirely from commodities as an asset class.
Despite a slow down in the overall economic growth rates of China, in my view, worldwide demographic trends related to population growth will continue to place supply pressures on several commodity types with supply capacity issues, notably agriculture and energy based commodities, while periods of market volatility will likely result in continued investor appetites for precious metals.
Disclosure: Hennion & Walsh Asset Management currently has allocations to DBE in several of its managed money portfolios.
Disclosure: I am long DBE.