Inflation is Coming

For a while now it has appeared that the level of inflation will be held down with the two inflation busters of high unemployment and factory capacity. These two have provided a buffer against inflation for more than a year but it has always been my contention that with all the quantitative easing happening around the globe that eventually there would be inflation even with no growth. The economic term for an economy with high unemployment and high inflation is stagflation.

Stagflation seems to be taking hold right before our eyes as this morning producer prices once again moved higher by 0.4 percent which was the same level of increase as was reported in August. This was "unexpected" as it was consensus that August was an anomaly. Now for all of you that trade futures and commodities like I do you would have known that this was anything but an anomaly.

Oil is over $80 per barrel, all the grains are at or near new twelve month highs, sugar and cocoa are trending higher and gold (the official barometer of inflation) has broken to all time highs. The official reason for the big jump was due to finished foods specifically meat and poultry. The reason for their move higher was a 26 percent increase in the price of corn which is used to feed these animals. So the inputs (raw materials) are finally starting to feed through to the output prices and this will lead to inflation.

Why do these prices continue higher? As the Federal Reserve continues to print money the dollar is plummeting, This will result in a move higher in the price of internationally traded commodities such as oil, grains and softs. In the end this will and has always lead to inflation. The question is when will the Federal Reserve try to combat it?

My answer is that they will wait too long mainly due to the fact that they believe it is under control. In addition attacking inflation now will result in another recession as it will choke off any growth and will certainly destroy a fragile housing market and banking sector. For these reasons they will leave rates too low for too long and the result will be high inflation with no growth for an extended period. My advice is to be prepared for a long dry spell in stocks (other than those tied to commodity prices) as the money will be made in commodities.