Your Wallet’s Worst Nightmare

January 30th, 2008 | Posted in Economy, Politics

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Of course I’m talking about inflation, the silent mugger that robs you of your buying power.

Here’s an excerpt from a newsletter I receive from the President of Everbank World Markets:

The Fed has turned its back on inflation folks… And here’s some items that you won’t see in the CPI data…
1. Grade-A Large Eggs - Dec. 06 $1.54 a dozen… Dec. 07 $2.10, and current $2.73 a dozen… That’s up 36% in a year!
2. White Bread - Dec. 06 $1.13 a loaf… Dec. 07 $1.28 a loaf, and current $1.62 a loaf… That’s up 12.6% in a year!
3. Whole Milk - Dec. 06 $3 a gallon… Dec. 07 $3.87 a gallon, and current $3.93 a gallon … That’s up 29% in a year!
4. Fresh Whole Chicken- Dec. 06 $1.06 per pound… Dec. 07 $1.17 per pound, and current $1.19 per pound… That’s up 10.3% in a year!

These are the things I talk about all the time, in that an individual can feel the inflation eating away at this wallet… This is just some simple food items… I’m not even talking about things like: Tuition… Insurance… Medical… Movie tickets… And so on…

The Bureau of Labor Statistics tells us that inflation is running at 4.1% a year. I guess things average out, but to an individual where the household’s largest expense is housing, auto/fuel, and groceries I can’t imagine that 4.1% would hold. It is just a hunch, but the last time I bought groceries with my wife (and paid attention) I thought she was crazy because the bread was $1.99 and the milk was $3.99. I told her “I swear milk is only 2 something and bread is under a dollar.” She pointed out that you can’t even buy generic bread/milk at that price. Certain I was right, I did the right thing and shut up and Google’d food inflation stats when I got home. Sure enough it was confirmed. I was living under an inflationary rock this whole time. Prices were stable for so long that I stopped paying attention to stuff like milk prices.

One thing to note is that much of the inflation in food is caused by transportation costs (fuel). High oil prices have a direct impact on food inflation. In fact it is felt more so in Asian countries where the rate of oil consumption is going up faster than the U.S. This is yet another reason why we must strive to encourage mass transportation, less urban sprawl, and alternatives to our oil-based vehicles.

The other factor that certainly can’t be dismissed is our monetary policy. The Fed cut rates down to 3.5% last week. I suspect that today we’ll be looking at 3.00% after today’s FOMC meeting. This will further stoke inflation and reduce the dollar’s value. Since most good we purchase are foreign it reduces our buying power. I guess a nice indicator to watch is to see if Wal-Mart keeps “rolling back” prices as our dollar devalues. I believe they are the largest importer of Chinese goods now of all the chains.

Well I mentioned food, but what about housing? Housing will be pumped up or at least not allowed to deflate with these current low rates. In addition there is some work going on to increase the FHA loan guarantee limits to upwards of 729K from a current 362K (for high cost areas). There is a general concensus that some areas of the U.S. such as San Francisco are as much as 30% overvalued. By passing this type of regulation the Fed doesn’t allow prices to come back in line. This gives the false impression that prices can’t fall. This is exactly the type of interest rate policy that caused the housing bubble in the first place. When I buy a stock at say $100 and then earnings don’t materialize, it may fall to $80. That’s the market. I don’t have the government stepping in to try to boost it back up. That just wouldn’t make any sense from an economics perspective. I sort of went on a tangent, but my point is housing inflation will continue as long as we keep printing money.