Why I Never Pay for Coffee at Sam’s Bakery

Grains of coffee and dollarsThere’s a local bakery near my office I try to get to at least once a week. Sam and his wife own the bakery, and Sam is usually the one there serving espressos and cappuccinos to the many small business owners who meet there early in the morning to talk about business and the economy.

My problem is that I never pay for coffee at Sam’s bakery. “Don’t worry Michael, it’s been taken care of” is the standard line Sam usually gives me. Either Sam is giving me free coffee or one person is buying for everyone in the bakery.

But I think my free coffee streak is about to end.

Kraft Foods Group, Inc. (NASDAQ/KRFT) recently raised the prices of its Maxwell House and Yuban coffee brands by 10%. This is after another company called The J.M. Smucker Company increased its prices. (Source: Bloomberg, June 8, 2014.)

But it’s not just coffee prices that are moving up. Even the government itself is now predicting food prices will rise at an accelerated rate this year.

According to the U.S. Department of Agriculture, inflation in food prices in the U.S. economy will be between 2.5% and 3.5% in 2014. This is compared to just a 0.9% increase in prices in 2013. Inflation of meat prices is expected to be much higher. Beef and veal prices are expected to increase 5.5% and 6.0% respectively this year. (Source: U.S. Department of Agriculture web site, last accessed June 10, 2014.)

I believe food prices will rise much faster than what the government is predicting; I’m talking real inflation of five to eight percent per year going forward. Why is this happening?

As I started writing here years ago when the Federal Reserve came up with the idea of printing money to stimulate the weak economy, money printing leads to inflation. The idea is very simple: the more paper money printed, the lesser its value.

To understand how inflation in the U.S. economy will eventually look, we need to look at a country far away from the U.S.: India. Between the years 2009 and 2013, the M1 money supply (coins, currency, and demand deposits, such as checking accounts) increased by 72% in India and prices in the country increased by 61%. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 10, 2014.)

During the same period in the U.S. economy, the M1 money supply increased by a similar amount—71.3% to be exact (see the chart below), but inflation remained subdued. The U.S. Consumer Price Index, an official measure of inflation in the U.S. economy, increased by only 11.5% from 2009 to 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 10, 2014.) Personally, I believe that this is because the U.S. has changed the way it calculates its inflation rate and that inflation is running at a much higher pace than the government’s official figures.

M1 Money Supply INDX Chart

Chart courtesy of www.StockCharts.com

I warn my readers: inflation in the U.S. economy is going to be a major concern going forward. There’s too much paper money that has been created and it will show its ugly side very soon. Food inflation is just one place where prices are rising. What you can buy for $1.00 now will get you a lot less in the years ahead.

How can a small investor protect him/herself from this? As inflation rises, interest rates will rise to cool inflation and that means investment real estate will fall in value. So I’m not a fan of investment real estate going forward.

Today’s depressed precious metal prices continue to offer investors a real opportunity to get into gold and silver (two great inflation hedges) at discounted prices. Both these metals should rise in value over the next five years as inflation accelerates.