Inflation Getting Worse
Food commodities have increased particularly much, being up 8% (an annual rate if increase of 151.8%) in the latest month, 22.8% (an annualized rate of increase of 127.4%) in the latest 3 months and up 55.3% in the latest year. Investors who have followed the advice of me and Jim Rogers to invest in commodities in general and food commodities in particular have in other words earned very high returns.
So far, the price of finished food products has increased a lot less than that for three reasons: 1) Finished food products reflect the cost of other things than food commodities, and these costs have increased a lot less. This is especially true for food served at restaurants 2) Retailers and wholesalers have reduced their margins 3)There is an inevitable time between movements on the commodity prices and the prices of finished food products as the price of food sold now reflect market prices a few months or so earlier.
Factor 1 will continue to ensure that the price increase of finished food products will increase slower than the price of food commodities. However, factor number 2 will be difficult to sustain and will probably eventually disappear and factor number 3 will certainly disappear in a few months or so. This implies that food prices will increase a lot more in 2008 than in 2007, when it for example increased a mere 4.8% in America at the retail level.
That sharply higher food prices is on the way is also evident in the producer price indexes. Finished consumer food products at the wholesale level were up 7.4% in the 12 months to December 2007, a lot less than the 4.8% reported in the CPI. Intermediate food products were up 17.5% and crude food products were up 25.2%. And remember, in December the increase in commodity prices were a lot lower than now. Because of factor 1, not all of this will translate into higher retail food prices and in the short term factor 2 and 3 will probably also have a mitigating effect. But later in 2008, factor 3 and probably also factor 2 will gradually disappear as a factor, which implies a sharp acceleration of food price inflation.
And as "core" inflation have recently begun to rise again and as I expect the oil price to start rising again soon, it seems safe to say that consumer price inflation will remain at their current high level of above 4% in America and above 3% in the euro area (It might briefly fall below those levels during the spring due to base effects, but even if that happens, it will only be temporary). Not that this will stop the Fed from cutting interest rates as they will continue to claim that inflation will fall, like they did before the recent surge of inflation to more than 4%. Because of this and the underlying trends discussed in Jim Rogers book Hot Commodities, commodities remain an attractive investment object while bonds remain very unappealing considering how they provide low -in the euro area- or negative -in America- real yields. While brief corrections are likely to come, the underlying fundamentals for commodities remain strong so the upward trend will remain.