Thursday, April 17, 2008

Inflation Coming or Going?

I'm more than a bit puzzled about what I perceive to be an impending inflation juggernaut not bearing its teeth sooner. Read some of the articles posted earlier relating to massive increases in commodities. Everyone knows oil; but coking coal is up 200%, iron ore 65%, rice over 100%, etc......

The Globe today had a bunch of articles pertinent and interesting in explaining what might be going on.

First, this from the Globe and Mail
Inflation dips, rate cut expected

HEATHER SCOFFIELD

Globe and Mail Update

April 17, 2008 at 2:16 PM EDT

OTTAWA — An aggressive 50-basis-point interest rate cut from the Bank of Canada is more of a sure thing now that inflation for March has proven to be benign, economists say.

Total inflation was 1.4 per cent in March from a year ago, the slowest pace since in well over a year and the fourth straight month of deceleration.

The core rate of inflation, which excludes the most volatile prices such as energy and some types of food, was just 1.3 per cent over a year ago, compared to the 1.5 per cent pace recorded for February.

Which is followed by the following articles:
China deal sends Potash soaring

JOHN PARTRIDGE AND ANDY HOFFMAN

April 17, 2008

Desperate for fertilizer to increase crop yields amid a looming global food crisis, China agreed to pay more than three times as much for potash as it did last year, launching Potash Corp. of Saskatchewan to a record stock price and within spitting distance of becoming Canada's largest publicly traded company.

And this
Runaway prices fuel Chinese unrest

GEOFFREY YORK

From Thursday's Globe and Mail

April 17, 2008 at 3:42 AM EDT

BEIJING — Construction worker Chai Changyi, one of the vast army of migrants from Western China who provide the muscle for Beijing's building boom, is always searching for the cheapest place to buy his meals. Lately it's becoming harder and harder to find anywhere he can afford.

"I used to spend 400 to 500 yuan (about $57 to $71) on food every month, but now it is 700 to 800 yuan," he says.

"A beef dish used to cost 10 yuan, but now it is 18 yuan and we've had to stop ordering it. The restaurant owners say they have to increase prices because vegetables and meat are more expensive now."

In the temporary kitchens and dormitories of China's sprawling construction sites, the rising cost of food is a source of rising discontent. The workers hope for higher wages, or at least some government action to ease the crisis.

Perhaps the temporary lull in inflation is explained in this article; it explains the lack of food inflation but not of other commodities soaring:
Against the grain

Why the world's crisis in food inflation isn't being felt in Canada – yet


HEATHER SCOFFIELD AND MARINA STRAUSS

From Thursday's Globe and Mail

April 17, 2008 at 12:20 AM EDT

OTTAWA AND TORONTO — Amid a deepening global food crisis, the cost of food for Canadian consumers has done something unusual: gone down.

Households across the country are enjoying the benefits of food deflation. Food from grocery stores was 0.6 per cent cheaper in February than a year ago – a stark divergence from the United States, where food prices are rising at 4 per cent a year, and China, where they soared 21 per cent in the first quarter.

Canadian inflation numbers for March are to be published today, but the trend is not expected to disappear overnight.

Canada's stronger dollar is playing a role in keeping some food prices down for consumers, especially imported fruits and vegetables, analysts say.

But the surging loonie doesn't explain everything. A closer examination shows food commodity prices are actually rising in Canada – they're just not being passed on to consumers at the supermarket.

The Bank of Canada's commodity index shows food prices at the raw materials level have soared more than 50 per cent in the past year. The index is in U.S. dollars, but even after converting to Canada's currency, food commodity prices have risen 28 per cent.

Consumers are benefiting from trench warfare between grocery stores, said CIBC economist Avery Shenfeld, who has dissected the food chain to determine how consumer prices are declining while raw material prices are soaring
.

So if food prices are being kept down in Canada due to fierce competition amongst grocers I think it is only reasonable to think the increases in food prices are coming and when they come they will be harsh. We're living on borrowed time.

What to do? Stock up on staples that have a shelf life. Go long on loans at the low interest rates available. Invest in things now that will save money in the long term like home energy efficiency. Invest in equities that will benefit from increased commodity prices. Be shy of investing in any stocks that rely on consumer spending. A storm is coming, best get ready for it. Usually the warning signs are not so obvious and there is not usually so much time to prepare.

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