Sharp January 2012 Food and Energy Price Increases Reason for Concern

Our neighbor to the north, Canada, just reported its annual inflation rate and it’s worrisome. The important items everyday Canadians need, like food and energy, continued their stubborn rise. The big drivers in January’s inflation numbers: a 4.2% hike in food and a 6.5% rise in energy, year-over-year.

Here in the U.S., the Producer Price Index (PPI) had its largest rise in six months in January, climbing 0.4%. In the 12 months to January, the PPI rose 4.1%. This means input costs for producers are growing at an annual inflation rate that is exceeding 4%!

 Like Canada, in December, deep discounts by large American retailers helped bring the inflation rate down in January in the U.S, accompanied by less demand for heating oil due to unseasonably warm weather on the East Coast. In the meantime, however, in the last 12 months, food prices are up 4.4%, while energy prices are up 6.1%. These are very similar numbers to Canada. How can anyone say we are not experiencing inflation?

Economists like to exclude “volatile” food and energy prices from how the inflation rate is calculated to create a “better” picture of the inflation rate (what is referred to as “core inflation”). Although I’ve never understood this concept and never will, if we play along, dear reader, for all of 2011, the inflation rate advanced 2.3%, which was the most since three years. I see inflation is showing up everywhere!

As I write this, oil prices are exceeding nine-month highs as political tensions with Iran continue to escalate. If oil prices continue to rise, this will place severe pressure on the consumer, and will cause the inflation rate to ratchet up even further.

 Hourly earnings for employed Americans fell one percent over the past 12 months to January 2012. This means the average American consumer’s earnings are not keeping up with the 2.9% rise in the inflation rate, but rather they are falling one percent!

With 70% of the U.S. economy being driven by the consumer and real wages falling, one has to seriously question how American companies can grow their earnings if the consumer cannot spend. All this just gives more credence to my theory that the market rally is not real. (Also see: Rising Food Prices Propelling Inflation Worldwide.)

Where the Market Stands; Where it’s Headed:

Let’s give thanks where thanks are due. World central banks have done a masterful job at increasing the supply of paper money over the past three years. This practice has expanded the bear market rally by a corresponding three years.

 In a nut shell, the Fed and other world central banks have fought the bear market in stocks tooth and nail. And in doing so they have simply managed to make the sucker’s rally we have been experiencing in the market more believable to investors…exactly what the bear market wants: more investors lured back into stocks before the bear takes their money away again.

What He Said:

“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.