The Coming Great Inflation

The table displayed immediately below is likely to surprise even our most-jaded readers. It shows the astronomical increase in cash prices for well-known food commodities over the past 12 months. With inarguable exactness, it contradicts the nearly constant prattle in the mainstream press that inflation is under control, or that it is peaking and likely to come under control sometime soon. Some items on the list have doubled -- even tripled -- in price over the past year. Others have risen at mere double-digit rates. These numbers signal a potentially serious inflation shock for the American consumer down the road as wholesale food inflation feeds through to consumer prices. It should be noted too that these are the rates of increase AFTER the highly publicized corrections during the first two weeks of May.

Cash Prices Food Commodities
(Prices for actual physical commodiities, not futures)

5/11/11Year AgoChange
Grains and feeds
Barley, top-quality Mnpls; $ per6.23.15+ 96.8%
Bran, wheat middlings, Kn. City; $ per ton178.043.0+314.0%
Corn, No. 2 yellow. Cent. Ill.6.6053.53+87.1%
Corn gluten feed, Midwest, ton150.4251.59+191.6%
Cottonseed meal, ton268.0175.0+53.1%
Hominy feed, Cent. Ill. Ton205.077.0+166.2%
Meat-bonemeal, 50% pro Mnpls ton440.0280.0+57.1%
Oats, No. 2 milling, Mnpls; $ per3.422.00+71.0%
Sorghum, (Milo) No. 2 Gulf cwt11.2756.83+65.1%
Soybean Meal, Cent. Ill., rail, ton 48%335.6289.7+15.8%
Soybeans, No. 1 yellow Illinois13.149.37+40.2%
Wheat, Spring 14%-pro Mnpls; $12.106.25+93.6%
Wheat, No. 2 soft red, St.Louis, shel7.584.18+81.3%
Wheat, hard, KC9.004.52+99.1%
Wheat, No. 1 soft white, del Portland, Ore7.724.84+59.5%

Beef choice 1-3,600-900 lbs.166.68154.05+8.2%
Beef select 1-3,600-900 lbs.160.27150.17+6.7%
Broilers, dressed 'A'; per lb.0.8650.8650.0%
Broilers, 12-city comp weighted avg0.84580.8527-0.8%
Butter, AA Chicago, lb.2.051.605+27.7%
Cheddar cheese, barrels, Chicago lb.165.25139.75+18.2%
Milk, Nonfat dry, Chicago164.0130.0+26.2%
Cocoa, Ivory Coast, $ per metric ton3637.03566.0+2.0%
Coffee, Brazilian, Comp.2.76371.2809+115.8%
Coffee, Colombian, NY lb.3.09742.0139+53.8%
Eggs, large white, Chicago dozen0.8850.595+48.7%
Flour, hard winter Kansas City cwt22.5513.9+61.6%
Hogs, Iowa-South Minnesota avg. cwt88.0483.12+5.9%
Pork loins, 13-19 lbs, Mid-US lb1.4151.54-8.1%
Steers, feeder, Oklahoma City, avg cwt142.13128.19+10.9%
Sugar, cane, raw, world, lb. fob26.3119.12+37.6%

Data Source: Wall Steet Jounal Market Data Center

The Bureau of Labor Statistics likes to underplay the role of food and energy in the cost of living and emphasize instead the less volatile core inflation rate. "If you don't eat or drive, inflation's no problem," the New York Times once quipped in a headline. For the typical American, though, the price of food is unquestionably a major issue, as well as a real-life indicator for prices across the spectrum of goods and services. In fact, for most, if food prices are rising that is the very definition of inflation and, as our table illustrates, food prices have risen with a vengeance.

I Can't Eat an i-Pad

William Dudley, president of the New York Federal Reserve, rationalized at a townhall meeting in Queens recently that "you can buy an iPad2 that costs the same as an iPad1 that is twice as powerful. You have to look at the prices of all things." A voice quickly came from the back of the room: "I can't eat an iPad!" Newsweek magazine thought enough of the retort to label it "the line that launched the Great Inflation of the 2010s."

Inflationary concerns go beyond that of the citizenry to those who manage vast capital pools for governments and large institutions. Last month, Mexico's central bank surprised gold market experts with the announcement of its acquisition of 93 tonnes of the metal. The central bank's Governor, Agustin Carstens, denied publicly that the purchase reflected a lack of confidence in the U.S. dollar. At the same time, it is difficult to explain the motivation as anything else. Interestingly, Carstens was quoted by Bloomberg in mid-April that rising commodity prices had "caused uncertainty about the inflation outlook in Mexico" and "complicated the bank's monetary policy." Even as Carstens spoke, Mexico was in the process of mitigating those concerns with an unprecedented gold purchase -- the third largest over the past decade.

Similarly, the University of Texas stunned the market with its announcement of a billion physical gold purchase. Kyle Bass, the hedge fund manager and board member who recommended the UT purchase, said, "Central banks are printing more money than they ever have, so what's the value of money in terms of purchases of goods and services. I look at gold as just another currency that they can't print any more of."

Adding inflation to systemic risk, gold's best days may still lie ahead

Since 2001, gold's bull market has been driven principally by systemic risks, not by inflation -- a circumstance that should give us all pause. Add rampant inflation to the mix, and you have the impetus for even stronger demand in the months and years to come. Mexico and the University of Texas are not alone in hoping to shore up their balance sheets with gold. The list in fact grows longer by the day.

Robin Griffiths is the highly-regarded City of London chartist who plies his trade at Cazenove, reportedly stock broker to the Queen. Citing "loose monetary policy," "money printing" and Fed chairman Ben Bernanke's "trashing of the dollar" he believes gold's bull market could go into hyperdrive. "I think it will all be over by 2015," he says, "a lot of it depends on how aggressively paper monies get printed from here on in. I think ,000 is an absolute minimum target. I can believe in targets certainly above ,000 and it's theoretically possible to go to ,000. . ."

Those targets should be taken with a grain of salt as should the 2015 timeline, but it gives you an idea what some contemplate for the gold price in the face of an accelerated inflationary, or even hyperinflationary, assault on the dollar's value. Ultimately, what the parabolic increase in cash food commodities over the past year is telling us is that gold's best days may still lie ahead.

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