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These inflation figures might surprise you. While Bernanke and the boys at the Fed seem most concerned about deflation, the prices of everyday items were off to the races in 2010. Thanks to a very helpful article over at WiseBread, we see that prices of nearly everything we use on a daily basis rose substantially over the past 12 months, some even doubling.

You should go to the original article for a more detailed breakdown, but here is a list of the major price moves of 2010. Remember, these are the price movements of the past twelve months alone:


  • Oil - ⇑ 25%
  • Gasoline - ⇑ 24%
  • Corn - ⇑ 53%
  • Sugar - ⇑ 29%
  • Cotton - ⇑ 109%
  • Coffee - ⇑ 64%
  • Lumber - ⇑ 47%
  • Gold - ⇑ 26%
  • Silver - ⇑ 73%

I don't think anyone can claim that we're not in a constant cycle of bubbles now. The housing bubble has burst, so now the Fed is inflating commodities. Actually, commodities have been inflating for the past decade, but things have really accelerated since QE1 and QE2. This spells big problems on the horizon.

When you combine increased food production prices with increased transportation costs, you run into a situation where (primarily) American speculators are causing the poor of the world to starve. It may be an unintended consequence, but violence and food riots in developing nations will be a byproduct of wrongheaded Fed monetary policy.

When will the Keynesians ever learn?

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Comments (28)

  • LIBOR's picture

    From Diane Swonk of Mesirow Financial:

    The only major driver of inflation is the weaker dollar, which has already boosted commodity prices and is expected to put upward pressure on import prices. It is important to note, however, that commodity prices make up only about 10% of input costs and have a smaller impact on pricing than wage increases or demand, both of which remain extremely price-sensitive. Sales and promotions remain the single, largest determinant of where most consumers shop, whether they buy in brick-and-mortar stores or online.

    http://www.mesirowfinancial.com/blog/economics/201...

    I think producers will let these input costs eat into their margins since they have very little pricing power with consumers. We see this in CPI core (In the bizzaro world without food and energy).

    Food, of course, is a very different animal. This could get ugly.

  • alexpasch's picture

    ^^^ You are right, margins are going to get hammered, users of raw inputs can only hedge so far out and the consumer is very price sensitive. Restaurants, supermarkets, etc. will have a really bad '11 as a result (and I'm not the first to say this by any stretch of the imagination, it's common sense and I've heard many analysts mention this as a theme for 2011).

    Consultant to a Fortune 50 Company

  • ivoteforthatguy's picture

    If we define inflation as an expansion of the monetary supply and not as a rise in prices, we would understand its insidious effects more clearly. The rise in prices is a consequence of inflation, and one that is inevitable given enough time and slow enough productivity growth.

  • PIE's picture
  • In reply to ivoteforthatguy
    LIBOR's picture

    ivoteforthatguy:
    If we define inflation as an expansion of the monetary supply and not as a rise in prices, we would understand its insidious effects more clearly. The rise in prices is a consequence of inflation, and one that is inevitable given enough time and slow enough productivity growth.

    http://research.stlouisfed.org/fred2/graph/?chart_...

    Over the past year, money supply has not really increased at all. Core CPI yr/yr is confirming this trend.

    As for the future, I think the deleveraging cycle that consumers and companies are going through will keep downward pressure on money supply, no matter how much the Fed "prints" money. The Fed has openly admitted that the goal of QE2 is to inflate assets such as housing and equities, not to stimulate lending. On the demand side, small businesses and consumers do not want loans. That is why (if you strip out the student loan component), outstanding consumer credit is declining (quite rapidly, I might add).

    http://www.federalreserve.gov/releases/G19/Current/ (strip out the federal outlays which are basically federally subsidized student loans).

    Also, demand from businesses for credit is not there as well.
    http://www.nfib.com/portals/0/pdf/sbet/sbet201012.pdf

    Scroll down to credit markets. A record 53% stated that they did not want a loan.

    So even if the Fed inflates the money supply with QE, it doesn't matter, since dollars in circulation are decreasing because businesses and consumers do not want to borrow any more money.

    Besides the above mentioned deflationary forces, wages are an enormous factor. I do not see any evidence that wages will be increasing significantly in the next 2-3 years. 9.8% unemployment, coupled with an output gap 6-7% below the long-term average, does not seem like an environment where wages will be rising.

    As for commodities, part of the increase is from sovereign "speculators" like China, who stockpile commodities instead of putting reserves in the dollar or euro.
    http://www.bloomberg.com/video/65183196/ (flip to 8:10)

    This buying will obviously stop once prices get to high (remember in 2008 when the US stockpiled oil for the SPR - in May 2008 congress passed an order to stop buying for SPR, and oil prices peaked a month or two later - http://www.opencongress.org/bill/110-h6022/show)

  • In reply to LIBOR
    ivoteforthatguy's picture

    <a href=http://www.wallstreetoasis.com/finance-dictionary/what-is-london-interbank-offer-rate-libor rel=nofollow>LIBOR</a>:
    ivoteforthatguy:
    If we define inflation as an expansion of the monetary supply and not as a rise in prices, we would understand its insidious effects more clearly. The rise in prices is a consequence of inflation, and one that is inevitable given enough time and slow enough productivity growth.

    http://research.stlouisfed.org/fred2/graph/?chart_...

    Over the past year, money supply has not really increased at all. Core CPI yr/yr is confirming this trend.

    As for the future, I think the deleveraging cycle that consumers and companies are going through will keep downward pressure on money supply, no matter how much the Fed "prints" money. The Fed has openly admitted that the goal of QE2 is to inflate assets such as housing and equities, not to stimulate lending. On the demand side, small businesses and consumers do not want loans. That is why (if you strip out the student loan component), outstanding consumer credit is declining (quite rapidly, I might add).

    http://www.federalreserve.gov/releases/G19/Current/ (strip out the federal outlays which are basically federally subsidized student loans).

    Also, demand from businesses for credit is not there as well.
    http://www.nfib.com/portals/0/pdf/sbet/sbet201012.pdf

    Scroll down to credit markets. A record 53% stated that they did not want a loan.

    So even if the Fed inflates the money supply with QE, it doesn't matter, since dollars in circulation are decreasing because businesses and consumers do not want to borrow any more money.

    Besides the above mentioned deflationary forces, wages are an enormous factor. I do not see any evidence that wages will be increasing significantly in the next 2-3 years. 9.8% unemployment, coupled with an output gap 6-7% below the long-term average, does not seem like an environment where wages will be rising.

    As for commodities, part of the increase is from sovereign "speculators" like China, who stockpile commodities instead of putting reserves in the dollar or euro.
    http://www.bloomberg.com/video/65183196/ (flip to 8:10)

    This buying will obviously stop once prices get to high (remember in 2008 when the US stockpiled oil for the SPR - in May 2008 congress passed an order to stop buying for SPR, and oil prices peaked a month or two later - http://www.opencongress.org/bill/110-h6022/show)

    This is an argument that was presented to me by an economist -- Fed accounts have gone up a lot in paper value, but the dollars haven't hit the real world yet. However, can prices not adjust upward in anticipation of future inflation? What if the demand side in the commodity markets are voting their opinion that the Fed will not withdraw that liquidity in the future and that the prices will be bid up -- and they are just acting in accordance with their rational expectations? A sovereign player like China, it seems, would have a massive incentive to get ahead of the game on this one since their trillion dollar USD hoard has just lost on the order of 20% against a basket of other first world currencies and commodities over the last year.

  • GoodBread's picture

    I don't think hyper-inflation is on its way. High commodity prices could lead to an economic slowdown and as the Fed backs away from QE3, a sharp pullback in commodities and PMs. There's too much whining going on in the media and D.C. about QE2 for a third one to be very likely, even if the economy hasn't really picked up.

  • AVPGuerilla's picture

    While I don't disagree that - to some extent - we're witnessing another asset bubble, you really have to look at what's been driving the run-up in softs. I'm a commodity banker (mostly ags) so I do have a solid background in this stuff.

    Coffee: Ever since the Colombian crop was decimated in 2009, it hasn't rebounded. Whereas colombia used to produce about 13mm bags of nice arabica, the new normal is about 9mm bags. So that's a major origin that's slashed production by about 25% in the past two years. Outside of Colombia, there still isn't enough good mild arabica bean to make up the difference. Lots of it has to do with social restructuring, in my opinion. If you are Guatemalan teen who grew up on a coffee farm, are you going to hang out and tend the farm or move into the city and go to college? Better yet, if you're a coffee farmer and can get 10x your annual income by selling your farmland to a developer, are you really going to keep on growing coffee? Origins are seeing rapid shifts in social structure, levels of education, et cetera. And while dollar debasement and spec buyers definitely have played a role in the run-up, the trade tends to think it's much more fundamentally driven, and current price levels ($2.40/lb coffee, about a 13-year high) are here to stay.

    Cotton: Largely fundamental - not enough cotton for China, and there's been a lot of crop damage this year. That said, fund to commercial longs got has high as 40 : 1 a few weeks ago, so there's a lot of spec forces pushing this bad boy up. Lots of merchants in the trade are getting squeezed & forced out of their hedges. If cotton merchants don't have a plethora of lines from solid trade finance banks, things could get very interesting if the rally keeps up. Everyone in the trade is talking $1.60 cotton... bearing in mind the usual band has been 70-80 cents, that's pretty astonishing. The term structure in cotton is severely backwardated - 11 cents! - reflecting the fact that US gins have not been able to move cotton fast enough. Trade idea here? Time spread... I'd short the nearby and go long the May contract -- why? There is a *major* fund influence in the front month. Funds are insanely long - and they can't take delivery , so if they want to keep playing the cotton market... they have to roll their positions to May, thereby compressing the backwardation. Just my 2cents ;)

    I'd keep on about softs - and could talk all day about Rubber and NG... but I have work to do!

    Long story short, there's some inflation in the numbers, but in softs, at the very least, the rally has been largely fundamentally driven. Emerging economies are growing at a much faster rate than origin production capacity. If anything, origin production capacity is on a downtrend because farmers don't want to farm any more - they want to go to college, get an edumacation, and work in an office.

    Step 1: Dream the Dream || Step 2: Live the Dream || Step 3: Rinse, repeat.

  • In reply to GoodBread
    Matt the Tiger's picture

    GoodBread:
    I don't think hyper-inflation is on its way. High commodity prices could lead to an economic slowdown and as the Fed backs away from QE3, a sharp pullback in commodities and PMs. There's too much whining going on in the media and D.C. about QE2 for a third one to be very likely, even if the economy hasn't really picked up.

    QE3 is only something they will talk about on CNBC or Bloomberg for the people involved to seem like they have macro foresight . HOW HOW could they justify the reasoning or justify the ability for another round. AND 3d time the charm is NOT an acceptable answer.
  • GoodBread's picture

    Lol @ 3rd time's a charm. I'm using QE3 as a catch-all term for what might be done once QE2 runs out. I'm not convinced the economy will have made much progress by then and the Fed might be tempted to pour some more money on the fire. What will most likely happen is rates stay put for a while longer and no further easing occurs.

  • TheBigCheese's picture

    I'll be the first to admit I'm not an economist. But the way I see it ... the increase in prices with the commidities are a direct effect of the Euro taking a dump on contagion fears, the US printing money with QE, constraints in the supply since the downturn effectively has everyone carrying less inventory, Russia having a bad 2010 with their grain yields, China being mentioned as considering fixing prices. And of course all commoditites are pegged to the dollar ... As the market forces the dollar up since they would rather have dollars instead of Euros ... so too goes the commodities. Personally, I think its more a result of monetary policies than a direct result of the economic fundamentals of supply and demand. The demand is still volatile and I see more demand being pushed through than what is being pulled through. Another reason I see this as being fabricated by the current circumstances is that the global economy is not at full capacity.

    So I ask, what will happen in 2 years when the dust has settled? Will that make these increases look like mild adjustment?

  • IlliniProgrammer's picture

    Yes. The cost of raw materials are up a little- that's generally a good sign in a recovering economy.

    But the bottom line is that the cost of the end products- driving or commuting to work, renting an apartment, generating electricity, cooking a hot meal- is only up marginally.

    Commodities prices are very volatile, Eddie- we see them surge in nearly every recovery. And the economy is handling it incredibly well. Inflation is only at about 1-2%.

    The Fed did the right thing by doing *something* in the midst of the worst financial crisis in 70 years- one that *could* have sparked 25% unemployment. Now, it is time for them to stop adding fuel to the fire, put an end to QE2, and maybe start to think about hiking rates.

    Oil prices climbed from $14/barrel to $90 over the past ten years. In the meantime, we've only inflated prices by about 30-45% depending on whether you believe the government's numbers or prefer to generate more pessimistic ones.

    Printing currency at the bottom was absolutely necessary. And it might be necessary to leave that currency outstanding. Nominal M0 hasn't really tracked nominal GDP over the past 30 years, and most of the supply of money hs come from an increase in its velocity. With decreasing velocity of money, we probably do need to permanently print more to simply keep the economy stable.

  • jankynoname's picture

    Why does everyone blindly believe the CPI figures? They are probably the most manipulated statistic in the modern world. There is a huge incentive for the BLS to under-report inflation. Look at the costs of a 1% increase in reported inflation: interest rate on treasurys and MBS issued by Fannie/Freddie have to go up a percent, social security and entitlement payments have to go up 1%, not to mention wage increases in the government sector. Excluding the wage impacts, I estimate the value of under-reporting inflation is worth $150 billion for every 1% (actual cost savings to government). This explains why the number is so bogus. Hedonic adjustment, substituting housing prices for "owners-equivalent rent", etc. these are all just devices to manipulate the figure. I prefer the Shadow Stats figures on inflation which calculates the CPI as it was in 1980 and 1990... http://www.shadowstats.com/alternate_data/inflatio...

    Regardless, I think this country is definitely headed for a hyper-inflationary spike in the next 12-24 months. Between an impeding energy crisis, huge increases in commodity demand from emerging mkts, and a reduction in output related to aging demographics, I think prices are headed dramatically higher. Call it fundamentals if you want but the end result is still going to be an oppressive price level. Everyone calling a bubble in the precious metals is going to be kicking themselves in two years when gold is at $2,500.

  • In reply to IlliniProgrammer
    AVPGuerilla's picture

    Illini, I have tended to think of you as one of the more observant voices on this board. But with all due respect, the below makes me question whether you indeed know what the fuck you are taking about.

    IlliniProgrammer:
    Yes. The cost of raw materials are up a little- that's generally a good sign in a recovering economy.

    But the bottom line is that the cost of the end products- driving or commuting to work, renting an apartment, generating electricity, cooking a hot meal- is only up marginally.
    .

    No. Wrong. Factually incorrect. There is nothing marginal about the rate at which NYC cost of living is outpacing wage growth.

    I used to (2007) rent a 2 bedroom apt in Astoria for $1100 a month. That same apartment now rents for $1900 a month. Up 70% in four years.
    That ain't marginal.

    My monthly metro north ticket is about to go from $260 to $310. Up 20% in one year.
    That ain't marginal.

    LIRR and NJ transit are also raising rates this year, anywhere from 10 to 20% depending on your zone.
    So... the cost of just getting to work to earn a buck is up as high as 30% this year.
    That ain't marginal.

    Raw materials- cotton and natural rubber are good examples- both used in every aspect of daily life- are both up well over 100% in the past 18 months.
    That ain't marginal.

    Con Edison- raising corporate elec rates by 12% on January 1.
    That ain't marginal.

    My water bill- raising rates by 20% on Jan 1
    That ain't marginal.

    I'll stop here with the list, but could go on.

    I guarantee - GUARANTEE - every reader of this post that it will be notably more expensive by fall to get dressed in a cotton dress shirt, commute to and from work, drop a deuce and flush, put food on the table, and do it again the next day.

    Let's talk CPI at 1-2%... Total bullshit statistic, I think most people on the street realize that.
    You do realize core CPI excludes energy and food prices, right?

    And commodities have never, EVER surged to this extent across the asset class before- metals, softs, everything is much more heavily correlated (about .7 now) than they have been in the past (about .3)

    We are witnessing the financialization of commodities as an asset class-- excellent paper on it by a couple guys from Princeton- google it.

    And the rally... The economy is handling it incredibly well? I beg to differ. As you mention we are in the middle of government subsidized economic activity. This is not the free market at work. But that's a debate for another thread.

    Step 1: Dream the Dream || Step 2: Live the Dream || Step 3: Rinse, repeat.

  • In reply to AVPGuerilla
    IlliniProgrammer's picture

    AssociateGuerilla:
    No. Wrong. Factually incorrect. There is nothing marginal about the rate at which NYC cost of living is outpacing wage growth.

    I used to (2007) rent a 2 bedroom apt in Astoria for $1100 a month. That same apartment now rents for $1900 a month. Up 70% in four years.
    That ain't marginal.

    My monthly metro north ticket is about to go from $260 to $310. Up 20% in one year.
    That ain't marginal.

    LIRR and NJ transit are also raising rates this year, anywhere from 10 to 20% depending on your zone.
    So... the cost of just getting to work to earn a buck is up as high as 30% this year.
    That ain't marginal.

    Raw materials- cotton and natural rubber are good examples- both used in every aspect of daily life- are both up well over 100% in the past 18 months.
    That ain't marginal.

    Con Edison- raising corporate elec rates by 12% on January 1.
    That ain't marginal.

    My water bill- raising rates by 20% on Jan 1
    That ain't marginal.

    I'll stop here with the list, but could go on.

    I guarantee - GUARANTEE - every reader of this post that it will be notably more expensive by fall to get dressed in a cotton dress shirt, commute to and from work, drop a deuce and flush, put food on the table, and do it again the next day.

    Let's talk CPI at 1-2%... Total bullshit statistic, I think most people on the street realize that.
    You do realize core CPI excludes energy and food prices, right?


    Of course. But how much are you paying in rent relative to four years ago?

    How much does a beer cost you relative to four years ago?

    How much does a book on Amazon Kindle relative to a book at Barnes and Noble cost you compared to four years ago?

    How much does a flat screen tv cost relative to four years ago?

    How much does food cost relative to three years ago (prices for pasta are down at least.))

    And commodities have never, EVER surged across the asset class before- metals, softs, everything is much more heavily correlated (about .7 now) than they have been in the past (about .3)[/quotte]<br /> And they haven't completely in this case either. Wood and natural gas, for instance, are still pretty darned cheap.</p> <p>What we are witnessing is commodities getting more expensive and labor getting cheaper. So in the end, that balances a lot of stuff out. You really can't talk about commodities on their own because unless you own a spinning wheel, you don't buy cotton. You buy cotton clothing. So the premium tacked onto the commodities is decreasing.</p> <p>[quote:
    We are witnessing the financialization of commodities as an asset class-- excellent paper on it by a couple guys from Princeton- google it.

    Howso? We had the same thing with the Hunt Brothers 30 years ago.
  • AVPGuerilla's picture

    I'm confused, first by this thing "unpublished comment" - saying I can't quote a comment that doesn't exists. And also by this 'report to mollom'. I've been away from the boards for a whiie. Anyway.

    RE: flat screens and amazon books - Technological advances... in absolute price terms yes they are getting cheaper to produce and buy. So your point is fair. That said, I think comparing prices for goods where there's been an underlying tech advance is a little unfair comparison to say rent, commuting, food, heating bills, elec bills... the basic cost of living stuff.

    RE: Rent... up 70% for the old place I used to rent. I pay a mortgage now, my monthly pmt has increased 9% since I bought in early 2008. (Westchester taxes).

    RE: Beer. Fair point. Still about $8 a pint at a bar, $16 for a 12-pack of Heinken. Hasn't moved much in the past four years. But we are talking price inflation in the *core* cost of living.... food/commuting/bills... the sht you need to pay just to earn another dollar and live another day. While beer is a very important part of my diet, if I absolutely HAD to give it up, I could. Can't get away from my taxes, dress shirts, commuting, taxes, water bill, elec bill,,, did I mention taxes? All of those are going up.

    There are a couple good reads on the commodity/inflation debate. Krugman (not a big fan of him, but he makes a good point in this article)
    http://www.nytimes.com/2010/12/27/opinion/27krugma...

    And those two chinese dudes from Princeton. This one is a beast of a read, but good for a skim.
    http://www.princeton.edu/~wxiong/papers/commodity.pdf

    Gotta get to work now!

    Step 1: Dream the Dream || Step 2: Live the Dream || Step 3: Rinse, repeat.

  • AVPGuerilla's picture

    oh yeah - the Hunt Brothers - same thing's happening in Copper now. Someone's cornering the market. So leave copper aside - kind of a one-off rally there. My point is across all ag's --- cotton, coffee, cocoa, rubber, wheat, grains, etc.... everything's moving in tandem these days. Steel's up too. Iron ore too. Scrap as well.
    It's insane... but GREAT for a commodity banker ;)

    Step 1: Dream the Dream || Step 2: Live the Dream || Step 3: Rinse, repeat.

  • IlliniProgrammer's picture

    Hmmm, AG, you can see my post but I can't right now. Something's up with the forums, methinks.

  • Edmundo Braverman's picture

    Yeah, I'm scratching my head over that one myself. I'm basically a God over here, and I've never seen the "Unpublished" designation on a comment before. I can see your comment, IP, but it says unpublished on top. Weird. Let me see if I can fix it.

    EDIT: Done.

  • WallStreetOasis.com's picture

    hey guys...I re-enabled the spam filter but it's a later version that keeps suspected spam comments unpublished (until an admin approves them or reports them to mollom). I still think it is oversensitive, but at least now it isn't blocking comments (just delaying publishing).

    ...trying to see if we can make it less sensitive now...

    Patrick

  • In reply to WallStreetOasis.com
    Edmundo Braverman's picture

    WallStreetOasis.com:
    hey guys...I re-enabled the spam filter but it's a later version that keeps suspected spam comments unpublished (until an admin approves them or reports them to mollom). I still think it is oversensitive, but at least now it isn't blocking comments (just delaying publishing).

    ...trying to see if we can make it less sensitive now...

    Patrick

    I just caught one on another thread that was bona fide, icky, toxic SPAM and it was unpublished. The new system appears to be working (fingers crossed).

  • In reply to AVPGuerilla
    IlliniProgrammer's picture

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  • In reply to IlliniProgrammer
    AVPGuerilla's picture

    Step 1: Dream the Dream || Step 2: Live the Dream || Step 3: Rinse, repeat.

  • IlliniProgrammer's picture
  • AVPGuerilla's picture

    Step 1: Dream the Dream || Step 2: Live the Dream || Step 3: Rinse, repeat.