Thursday, May 26, 2011

Inflation! Much!

I sat in total disbelief this weekend when I read in the newspaper how much prices have changed for food and fuel in one year. I obviously notice the small daily price changes at the gas station, but it's a little different to see the total change in one year.
And yet the Federal Reserve has the gall to tell us that they were worried about deflation, and had to enact Quantitative Easing 2.0.   Sure, there are major items that are dropping in price, such as homes and iPods. But I love the guts of the man who reminded Ben Bernanke that you can't eat an iPod.
So, I found the following website that confirms the data I saw in the newspaper regarding inflation.

Here's a list of some of the major commodities and how much they have changed in one year. It's completely absurd that the Federal Reserve could be printing money right now. Luckily, they've decided to stop printing money after QE2.0 is finished.  

Commodity Price Index  Ratio  is 1.32.    This is a 32% increase in prices in one year!!!  This means that average price of the following items has increase 32% in one year:  fuel, food and industrial inputs. Here's a breakdown of some of the major items that go into the Commodity Price Index.

Wheat -- Ratio of Price in April 2011 to Price in April 2010   = 1.75    A 75% increase in one year

Corn = 2.02     A 102% increase

Coal =  1.22     A 22% increase

Crude Oil - WTI = 1.30      A 30% increase

Natural Gas   = 1.05     A 5% increase

Poultry  =  1.01     A 1% increase

Beef =  1.17         A  17% increase

Cotton = 2.46       A  146% increase in one year!

Gold = 1.29%        A 29% increase

Silver = 2.35   A  135% increase

I don't understand how the Federal Reserve could justify printing money when the commodities price index is up 32%. Because of the higher commodity prices, the Consumer Price Index is up 3.2% since April 2010 (clearly the negative effect of iPods and homes is why the CPI isn't over 10%); and the Final Goods Producers Price Index is up 6.5% since April 2010.

The purchasing power of the dollar has dropped significantly in one year!  And the money I have in my bank account is sitting at essentially 0%, i.e.the real interest rate is  -3%/yr to -6%/yr, depending on what index you look at.

We really need to maintain a near 0%/yr inflation rate. If I earned a dollar, then the government shouldn't be able to just take my money away by inflating the currency. We've got some potential problems coming down the road unless we figure out how to make some money, and make some money fast.

So, here are a few of my off-the-cuff thoughts for win-win projects that could help:
1)  Sell more Federal lands for oil, natural gas, coal and minerals rights.
2)  Remove most troops from Afghanistan
3)  End subsidies & mandates for corn-ethanol immediately!

And here's a list of win-lose projects that might help the US starting paying down the debt (or to be used to take money out of the system to prevent inflation):
1)  Sell large portions of the US deposit of gold and silver
2)  Sell Amtrak and perhaps the US Postal Service
3)  Sell any remaining stakes in the businesses we bought during TARP

I'm just listing the items above to get people thinking about how we solve what looks to be a major problem:   we are inflating our currency because we are in debt and running deficits. A 32% increase in the price of commodities is a problem, and it could be a worse problem in the future. Food and fuel are leading indicators of where inflation is headed in the future because they are the basic building blocks for our society. We need to brainstorm all of the options available to stop inflation (which has the tendency of hurting the poor a lot more than it hurts the rich), and then we need to act!

Post Note:  here's an informative video by Milton Friedman on Inflation

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