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Thursday, June 05, 2008

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 Rebate

Along 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.

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