Scorching Hot Food Inflation

Today,
we are seeing the US dollar go up and gold go down. That’s interesting,
considering that inflation is nowhere near tamed.U.S. Agriculture Secretary Ed Schafer:
” We are anticipating this year an over 40 percent increase in food
price inflation globally, 43 percent approximately.” Schafer added: “Of
that we can identify two to three percent of that price increase that
is driven by biofuels.”So Mr. Schafer says something to scare the pants off us — 43% food inflation. The same number was cited by Edward Lazar, chairman of the Council of Economic Advisors, in his testimony to the Senate last month. Most people seem to have missed that.At the same time, Schaefer’s 2% to 3% figure for biofuel-caused inflation sounds bogus. So what can we believe?If you believe the IMF,
the shift of crops out of the food supply to produce biofuels accounts
for almost HALF of the recent increases in the global food prices.Here’s
a fact: 25% of total US corn production was dedicated to ethanol in
2007. Now, you can argue that if it weren’t for ethanol, farmers
wouldn’t be planting all that corn. Maybe the truth is somewhere in the
middle between the IMF and the USDA. In any case, inflation is hot and
getting hotter.We have already seen the Reuters/University of Michigan Surveys of Consumers gauge of five-year inflation expectations rise
to 5.2%. That’s the highest since February 1982, when even beleaguered
consumers couldn’t grasp how high inflation really was. The actual
consumer inflation rate at the time was above 7%.Mr.
Schafer says much of the world faces 43% food inflation, but here in
America, the world’s breadbasket, things aren’t that bad … yet. At
the same time that global food inflation clocked 43% (the 12 months
ending in March 2008), US food inflation was just 4.5%.On an annual basis, U.S. food prices rose 4% in 2007, compared with an average 2.5% annual rise for the last 15 years, according to the U.S. Department of Agriculture.But prices keep accelerating. Slate explains that food inflation in the US is now running at a 9% annual rate, up from the normal 2%:Food
already eats up about 14 percent of the typical American’s household
budget. By Rosenberg’s reckoning, Americans sticking to their regular
diets are paying an extra $25 billion per quarter compared with last
year.Food, Fuel and the Tax RebateAlong
with food prices, energy inflation is also squeezing consumers. Energy
inflation is so bad that 17.2 million tax-refund recipients plant to
use some of the money to buy gasoline.American companies are already lining up to siphon those tax rebates for the high cost of groceries. Kroger grocery stores have set up programs that permit people to exchange stimulus checks for gift cards with a 10 percent bonus.The
tax rebate is going to be worth about $120 billion. The combination of
food and fuel inflation will cost Americans an extra $50 billion in
just the current quarter. You do the math — we’d have done much better
to keep a lid on prices and skip the tax rebate.But I don’t think the government can keep the lid on prices. That genie is out of the bottle.Bottom line: I think the move higher in the US dollar and down in gold is short-term, and due to the jawboning by Fed Chairman Ben Bernanke
and rotation by fund managers and others. I think the longer-term trend
will be much higher. It’s likely this pullback will give us a chance to
do some bargain hunting.

Last 5 posts by Sean Brodrick

• The Golden Phoenix - February 25th, 2009
• Blessing in Disguise - February 4th, 2009
• What I'm Reading Today - January 7th, 2009
• Gold and Oil Short-Term Trends - January 7th, 2009
• Is Gold Poised for a Pullback? - January 6th, 2009