Hey Ben, Rising Costs Are Killing Us!

Are you noticing your wallet getting lighter these days? Are you finding yourself sitting down on the 31st of the month and wondering where all your money went? I sure am!

The 32-ounce Diet Coke I buy every morning at the Mobil station on my way to work? It went from $0.55 to $0.62 recently. Thats a 13% rise.

At the grocery store, I used to buy 16 rolls of paper towels for $10. Now, I pay $12. The cost of diapers, formula, milk, eggs, and bread have all gone up, too!

Gasoline? Even filling up our gas-efficient car costs almost $30 vs. $20 not too long ago. Thats forty bucks more a month.

Day care for our two daughters has gone through the roof. When Maya was in the infant room back in 2003, the monthly cost was in the high $600s. For Zoey, it started out at $800. Just this month, it jumped another 5%.

My electricity bill is running at $240 a month or so right now, thanks to fuel surcharges and rate hikes from Florida Power and Light. A year ago, I was paying about $30 less.

My property taxes? We sold our old house and moved into a new place back in 2004 because we were planning on expanding our family. Our square footage almost doubled … but our property taxes more than quadrupled.

The reason: Easy Alan Greenspans ridiculous interest rate hikes ignited the mother of all housing bubbles. Prices down here in Florida shot up. We had to pay much more per square foot and even then, we were lucky. We signed our contract more than a year before construction was completed. That allowed us to lock in a 2003 price, when things were just heating up. In 2004 and 2005, the market went certifiably nutty.

And dont even get me started on homeowners insurance. We recently found out that we were underinsured. On top of that, our insurance carrier just got taken over by the state because of hurricane-related financial instability.

The upshot: We have to increase our coverage amount and buy into the teeth of a massive, insurance rate-hiking campaign going on here in Florida. It looks like our monthly nut is probably going to double or more!

Well Survive
But What About
The Less Fortunate?

I could go on and on about rising costs. And I bet you can too. Youre probably confronting your own inflation demons right now.

This is why I think Fed Chairman Ben Bernanke is full of it when he calls inflation well contained.

Inflation is an insidious thing that sneaks in like a thief in the night. At first, it steals a few pennies and nickels. But soon enough, its taking whole dollars.

And thats why Bernanke needs to fight inflation with all hes got.

Thankfully, my family and I will do just fine.

But what about the single mother trying to get by on a $12-an-hour job? What about the struggling families being forced to choose between buying gas and buying groceries? Inflation is killing them!

And what about the homeowners who could only afford to buy houses with suicide mortgages thanks to the Fed-fueled housing bubble?

Former Fed Chairman Alan Greenspan trumpeted the virtue of adjustable-rate mortgages back in 2004. That was the absolute worst possible time to choose an ARM instead of a fixed-rate loan. Still, lenders sold them like crazy.

Now, those borrowers are feeling the squeeze as rising inflation drives their interest rates (and payments) through the roof.

The Cost of Acting
Now Versus Later

Heres what I think Bernanke should do: Keep hiking rates until inflation is dead and buried.

Ill be the first to admit that rate hikes wont be painless. Theyre already helping squash the housing market. And thats hurting job growth in sectors like construction.

Plus, if rates get restrictive enough, we could see the weakness spread to retail … tech … and other sectors.

But whats the alternative? Accommodate $76-a-barrel oil? Flood the system with more money as a short-term fix to higher electricity and day care bills?

That will only cement inflation expectations … and lead to even higher prices down the road.

Remember: The Fed took that approach back in the 1970s. And in the end, a newly appointed Fed Chairman, Paul Volcker, had to come in and jack up rates to a whopping 20% to finally quell inflation once and for all. In the process, he caused the worst financial crunch since World War II.

I recognize that our economy is not the same as it was back then. Theres more global trade a much larger global worker base and companies have proven more adept at finding ways to cut costs. These changes have helped stave off inflation at the consumer level.

But one by one, those barriers are falling. I see the evidence every time I buy a soda, pay my electric bill, or take my daughters to day care.

I hope the worlds central banks do the right thing. But hope is not a valid investment strategy. Some moves to consider:

First, make sure you sock away as much money as you can. We could be in for some rough sledding thanks to a deadly combination of U.S. housing market stress and rising global inflation.

Second, keep your fixed-income investments in short-term instruments, like Treasury bills, rather than 30-year bonds.

Third, look into safety stocks that are demonstrating pricing power. One example: Companies making those groceries that are costing us more each day.

Fourth, consider investments that are designed to go up when the housing market is going down, such as LEAPS put options on construction companies. Theyre not for your keep-safe money. But they can be a great hedge.

Until next time,

Mike

P.S. Were making several new stock and LEAPS recommendations in our just-published Safe Money Report. One is extremely close to setting a new all-time high. Another is at its highest level in more than six years. If youre interested, just call 800-236-0407. The cost is only $0.27 a day.

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About MONEY AND MARKETS

MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.

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