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While it is difficult to argue that inflation is officially a concern for the US, there is no doubt that inflation is heading higher. In each of the past three months, headline inflation – which includes the more volatile energy and food prices – exceeded economists’ expectations, the first time that this has occurred since May through July 2008.
What we definitively know is that there is a growing disparity between core and headline inflation measures, due directly to soaring food and energy prices.
Most of us may not realize, however, that when food prices are adjusted for inflation, the cost of food over the past decade was extraordinarily low, according to the International Monetary Fund. In fact, real food prices are their lowest since the Great Depression.
It only seems natural that a growing middle class in the emerging markets would demand more protein intensive diets, causing food prices to track higher. This also means that food prices are unlikely to retrace any of their recent gains – essentially, we are facing uncomfortable food prices on a permanent basis.
In a potentially troubling development, a number of corporate conference calls in recent weeks suggest that companies are ready to pass costs on to consumers in the second half of 2011 and into 2012, particularly in the retail sector. Nike, for instance, indicated on a conference call last week that it will undertake “significant price increases across a broader range of styles” in 2012 – a direct result of growing production costs (labor and commodities, especially) in emerging markets.
The inflation story is not as simple as that, however. In early March, BJ’s Wholesale Club stated that increased competition in televisions, tablet PCs and electronic readers is forcing prices down in electronic equipment.
Inflation is becoming a touchy subject around the globe as central banks debate whether prices are rising quickly enough to hinder global growth. Consumers should be prepared for higher prices in many staple categories, such as retail and food. These industries are directly impacted by commodities and emerging market labor costs. Producers were initially willing and able to refrain from passing costs along to consumers, but that phenomenon is about to come to an uneasy conclusion.