The Coming Price Inflation

I would like to focus on three price indexes that were released in the last week: the ‘Import and Export Prices‘, the ‘Producer Price Index‘, and the ‘Consumer Price Index‘. These particular indexes are for October of 2009. The vast majority of analysts believe that the year over year and month over month percentage changes in these price indexes are too low to warrant any concerns for coming price inflation, but I disagree.

First, the year over year rate is flawed in a sense. When the stock market crashes and prices for commodities plummet, the year over year rate is going to be low (i.e., pre-crash prices to post-crash prices). In the past one and a half years, oil had skyrocketed to $150 in July of 2008 and fell to a low of $30 in February of 2009. In October of 2008, the average oil price (computed from here by averaging all of the oil prices for October of 2008) was nearly $74. Fastforwarding to October of 2009, the average oil price was nearly $76. So yes, year over year the price change for oil appears to be subdued; however, if oil remains at its current price of around $80 for the next several months, we will see a year over year percentage increase in price of nearly 267%. That is hardly subdued!

One might say: of course you’ll get extremely high percentage increases when you compare top to bottom. But, we must realize, if the price of oil remains at $80 until February 2010, the price will have nearly tripled from a year before.

There are many other commodities that are exhibiting this same sort of behavior.

From the ‘Import and Export Prices’ report, note that although the “year-on-year rate for import prices looks benign at minus 5.7 percent … the index is up 8.1 percent since [this] February.” Price inflation is hardly subdued!

Then, in both the ‘Producer Price Index’ and ‘Consumer Price Index’, we appear to be beginning to cross over from negative percentages to positive percentages for the year over year rate (core PPI excludes oil prices):

You can take a look at the numbers in the reports yourself; I just wanted to put out a few of the trends I see.

In summary, I think as time goes on, the year over year rate will rise dramatically due to the collapse in commodity prices in 2008. I believe there are two reasons commodity prices are rising so rapidly: massive monetary pumping by the Federal Reserve and healthy demand from foreign countries (such as: China, Australia, Brazil). If commodity prices keep rising at the rate they are, the United States is going to be left behind because a real recovery has not taken place here yet and will not take place here (due to the policies pursued by our government).

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