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What’s it going to take? What will it take to get the Federal Reserve to join the rest of us in Realityland when it comes to inflation? That’s the question I keep asking myself day after day … week after week … month after month … as prices continue to spiral higher.
Just get a load of what we learned about import inflation in the month of April:
First, the cost of goods imported from abroad jumped 1.8%. That was bigger than the 1.6% increase that economists were expecting. More importantly, the year-over-year rate of import inflation soared to a whopping 15.4%.
How out of control is that? Look at this chart. You can see that we have NEVER seen import prices increase this much, or at least not since the government began tracking such figures back in 1982:
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Second, ex-petroleum import prices were up 1.1% on the month, and up 6.2% from a year earlier. That’s the fastest rise since 1988. Even if you strip out all fuels, you get a 1% monthly rise and a 5.8% annual rise.
Third, food and beverage prices climbed 0.4% on the month (12.6% year over year), industrial supply prices rose 3.9% (37.3% year over year), capital goods prices jumped 0.8% (2.1% year over year), and consumer goods prices gained 0.2% (2.8% year over year).
In other words, the news was bad across the board. The cost of goods coming to our shores from Asia, from Europe, and from elsewhere is rising due to the slumping dollar and the general inflationary trend we’re seeing worldwide.
The Curious Case of the
Latest CPI Report
Of course, the import price report isn’t the only inflation gauge we get each month. The one that’s most closely followed is the Consumer Price Index. And the news there was actually better than expected — at first glance.
The overall CPI rose 0.2% in April, down from a gain of 0.3% in March. Meanwhile, the “core” (ex-food and energy) CPI gained only 0.1%. That brings the year-over-year rate in CPI inflation down to 3.9% from 4%, and leaves the core CPI year-over-year gain at 2.3%, down from 2.4%.
But to call this CPI report a little fishy would be the understatement of the century. Did you know that gasoline prices fell 2% in April? Or that airfares dropped 0.5%? It’s true — or at least, it is if you buy the numbers the Bureau of Labor Statistics is selling.
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Never mind that the New York Times just reported this:
“Airlines have raised fares or increased surcharges, partly to cover the rising cost of jet fuel, at least 10 times so far this year — most recently on Thursday, when American Airlines and Delta Air Lines raised ticket fees again. The increases have wiped out many of the discounts the carriers offered in 2007 to fill planes.
“Full-fare coach tickets on some transcontinental routes, like Los Angeles to Philadelphia, now cost more than $1,000 round trip. Leisure fares, bought in advance, are back to what passengers paid in 2006, or about $230 round trip on average, according to Robert Harrell of Harrell Associates, which tracks air fares. Business-class tickets are up 30 percent from the recent lows touched three years ago, when Delta cut fares sharply, Mr. Harrell said.”
Or that CNNMoney.com had the following to say about gasoline costs:
“Retail gas prices hit record highs for the seventh day in a row, auto group AAA’s Web site showed Wednesday.
“The nationwide average for a gallon of regular unleaded hit $3.758, up 2 and six-tenths of a cent from the previous day’s high of $3.732.
“Gas prices have now risen for eight straight days. The pinch on consumers at the pump comes just ahead of the summer driving season.
“The AAA national average shows gas prices up more than 11% over the past month and up nearly 22% from year-ago levels.”
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| Gasoline prices have exploded across America, contradicting the government’s April CPI report. |
According to the number-crunchers in Washington that stuff never really happened. Curious, isn’t it? Gas and airfares are actually going down. You gotta love it!
Still, at least one part of the CPI report reflected what IS going on in Realityland: Food prices surged 0.9% in April, the single-biggest monthly increase since January 1990. That’s absolutely what I’m seeing in my budget, and it just goes to show that average Americans ARE feeling the inflationary pinch.
What You Can Do About
This Lousy Situation
I don’t know when the Federal Reserve will start raising rates again. I know that they should do so as soon as possible. Even if you buy the 3.9% year-over-year rise in April’s CPI data, you still end up with a deeply negative REAL federal funds rate of -1.9% (2% nominal funds rate minus 3.9% inflation rate).
All else being equal, that’s an interest rate policy that essentially “underwrites” inflation and asset bubbles. And I, for one, am sick of living with those conditions.
Unfortunately, my invitation to join the Fed seems to have gotten lost in the mail. I don’t expect these policymakers to do what they should in an election year, especially one which features a still-hurting housing market. So as investors and Americans, we’re going to have to take matters into our own hands.
My suggestions: Stay the heck away from long-term bonds. Buy select higher-yielding stocks — maybe even preferred shares — that offer returns that eclipse inflation.
You can also buy “insurance” against rising interest rates. One mutual fund designed to provide exactly that was recently recommended in Safe Money Report. [Editor’s Note: Click here if you want more details.]
In short, we’re somewhat of an “Inflation Nation” now — and we all have to adjust to that reality.
Until next time,
Mike
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