Thursday, January 27, 2011

The Silent Inflation

Inflation is hazardous to your wealth! Our government is doing it's best to avoid a deflationary scenario - and for good reason - but, the inflation NOT being acknowledged is going to be problematic at some point.

The consumer price index (CPI) continues to lead us astray. If we consider the source, we should question the #'s. The government providing the data is akin to the 'fox in the hen house.' Report the actual # and they are forced to increase both social security and short term borrowing rates. With an exploding budget deficit, I'm confident real #'s won't be reported anytime soon.

The United Nations reported this week food prices are up dramatically from a year earlier. And, they are causing riots in certain parts of the world. Commodity prices increased 30% last year and continue to move higher in early 2011.

Many of us don't remember the 1970's, but history often repeats itself. If we go back in time, we can see the biggest asset winner during the '70's was commodities. Inflationary pressures hurt stocks & bonds, but oil, natural gas, gold, silver, wheat, cotton, etc. all skyrocketed in value during the decade. You can argue we are now in a similar situation.

The reported #'s from Washington continue to hover around 2% per year. This is both misleading and inaccurate. We often hear, 'if we discount food and energy' from the reported CPI due to volatility... if both categories came back to earth in due time, this may be acceptable. However, it's not very likely - nor realistic.

Last week, Sherman Williams announced paint increases of 8%. Kimberly Clark announced a 5% increase on certain paper products and McDonald's announced they will have to pass along higher food prices to consumers in the near future.

The American consumer is certainly capable of handling some price increases. The difficulty arises when prices rise faster than salaries. Many companies are opting to reduce product size and charge the same price. A back door kind of inflation... less stuff, same price. This is why your favorite coffee cake snack is now the size of a quarter!

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