Rising Consumer Inflation: The New World Order By Commodity
By Dian L. Chu
Ever since the Great Recession, inflation has been put on the back burner, and deflation is seen as the greatest risk to the U.S. economy. Even as recent as Friday, Jan 7, Federal Reserve Chairman Bernanke told the Senate Budget Committee that low inflation/deflation was a concern, as well as unemployment (more on the jobs situation here.)
Deflation Concern Lead To QE2
In fact, Bernanke said the continuing high unemployment and low inflation had prompted the Fed’s decision to purchase another $600 billion of U.S. government debt (QE2) to further stimulate the economy.
So far, the two inflation measures—Consumer Price Index (CPI) and Producer Price Index (PPI)—have not proven him wrong yet, as both indexes have been subdued in recent months.
Well, expect this nice peaceful trend to change as early as the December CPI and PPI releases this week.
Pent-Up Inflation Pressure Up The Supply Chain
During the past decade, Finished Goods PPI has risen roughly 35% while the CPI was up about 30%, which seems to suggest producers typically pass through most of the cost increases to the end market.
And news such as the following could only mean that there’s pent-up inflation pressure up the supply chain just waiting to be passed through:
•Commodity prices jumped to two-year high on expectations for global economic growth and lower U.S. forecasts for agricultural inventories.
•The Food Price Index (See Charts Below) compiled by the U.N. Food and Agriculture Organization (FAO) surged 25% in 2010 and hit an all time high in December, at the level even worse than the food crisis in 2008. FAO acknowledged that this is unlikely the peak yet.