Friday, July 11, 2008

A Closer Look At Inflation

Bread PriceInflation certainly has been on the rise of late, but a closer look at Inflation might reveal some things that are lost in the hype. If we actually look at what is driving inflation right now, the resounding culprit is commodities. From food to construction materials--and, of course, oil--commodities are seeing dramatic increases in prices. Since these are things that consumers see and buy every day naturally they are feeling the pressure, and because they are items they deal with everyday and can see how prices are increasing, it means that inflation is on their minds. In all of this, the fact that prices on many items and services are actually falling--in some cases dramatically--is being lost in the fray. In addition, there are some other underlying factors surrounding employment that could also have a serious impact on inflation.

I was reading an article from Michael Shedlock (a.k.a. "Mish") that was posted on Seeking Alpha which really brought out this next point. In the article, Mish quotes a business owner who had e-mailed him about how he is now able to get workers for $8 to 12 an hour that were previously costing him $15 to 20. Then Mish goes on to talk about how jobs have declined for six consecutive months, and that in order to break even on the job front (taking into account new people joining the workforce), we have to add at least 150,000 new jobs. He also talks specifically about how state and city layoffs are at 45,000 so far and mounting, along with the fact that strip mall vacancies are at their highest levels in more than 10 years. These are just some of the ominous signs for employment, but the basic idea is that unemployment is continuing to rise and employers have all the leverage right now.

With unemployment rising, wages seemingly falling (in some cases, at least) and people being scared out of their mind about the economic prospects, we can expect spending to fall. This was already the case before the stimulus payments went out, and as those payments dry up, so should the little boost in spending we are seeing. As demand for products and services fall, companies will have to lower their prices in order to sell their products. In some cases this may lead to businesses going under or push competitors to consolidation; regardless, we will surely see some changes.

Predicting commodity prices is a little harder because demand for commodities does not just come from Americans. Much of the commodity price increases can be traced to the ridiculous amount of growth going on in several Asian countries right now, particularly China. They are seemingly willing to pay whatever they have to in order to get their hands on materials, and it is forcing the price up for everyone. If I had to guess, though, I’d say that we should see some easing in commodity prices soon. As the U.S. and other western countries start to scale back, it will impact those Asian countries which are providing us with exports. As we cut back on our consumption, they will have to cut back on their production, resulting in less demand for the commodities used to make the products. The main thing I think that we have to worry about is food. While Americans certainly can do with a cut back in their diets, we still have to eat. Considering that we are continuing to use an increasing amount of food supplies for fuel, and the increase in global demand and consumption, food will continue to be highly sought after, although a modest price drop is not out of the question.

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