Worldwide Inflation Data Reveals Building Pressure

New data for inflation for the U.K. and U.S. was released this morning.  As has been the case since the beginning of the financial crunch, reported data for the U.S. continues to suggest that inflation is tame.  This, of course, is at odds with real life experience, which suggests the opposite.

The Producer Price Index (PPI) edged lower 0.1% last month, the second decline in the past 3 months, the Labor Department said Tuesday.  Core inflation, which excludes energy and food rose 0.2%, slightly faster than expected.  But over the past year, core prices are up just 1%.  Core prices, an invention of the government, are hardly representative of anecdotal experience since they assume that no one eats or drives.

For April, food costs dipped by 0.2%.  It was the first decline in 9 months and came after a 2.4% surge during the previous month - the largest gain in 26 years.  The March increase reflected the impact of a winter freeze in Florida that heavily damaged citrus and vegetable crops.  Energy prices fell 0.8% in April with gasoline prices down 2.7%.

In the U.K., the reported numbers were far less sanguine.

Inflation leapt to 3.7% in April, significantly higher than expected, prompting a letter of explanation from the governor of the Bank of England to the new Chancellor George Osborne.

The annual inflation rate of the British Consumer Price Index (CPI) was up from 3.4% in March and well above the Bank’s 2% target.  Economists had projected inflation to hit 3.5% this month.

The retail price index measure of inflation jumped even higher to 5.3% in April from 4.4% in March and reached its highest since 1991.  The retail price index is used as a benchmark for many public sector contracts, benefits payments and wage settlements.

The further rise in inflation will prove sticky for the Bank of England.  Interest rates are still at 0.5% and the Bank pumped £200 billion in newly created cash into the economy to fight the recession.

This news comes after many Asian countries are also experiencing various aspects of inflation - especially in the form of what appears to be housing bubbles.  The housing price escalation is particularly prevalent in China and Australia.  We have written two very recent blogs on the issues which can be reviewed by clicking http://markostake.blogspot.com/2010/05/asian-inflation-contagion.html and http://markostake.blogspot.com/2010/05/rising-chinese-inflation-augurs-well.html.

One has to remain vigilant as to the accuracy of inflation data as reported by the Labor Department.  As we've also pointed out in various pieces, the methodology for computing the CPI has been altered several times since the beginning of the Clinton Administration.  The effect of these alterations has been to substantially reduce the reported number.  According to Shadow Stats (http://www.shadowstats.com/), the CPI would be reported at closer to 6% if the pre-Clinton methodology was still employed today.

The important thing to keep in mind is that the PPI and CPI are not necessarily indicative of what any individual will actually experience.  A better measure is to review your outflows and compare them to the past.  If your expenses are rising at 10%, then a tame CPI or PPI is completely irrelevant.

It's inevitable that even the reported numbers will start to creep higher and this should occur in the very near future.  The most objective measure of inflation expectations is the GOLD market, which continues to surge to new all-time highs.  If that market screams INFLATION, why isn't Uncle Sam listening?

Marko's Take

Some websites we like and urge you to check out are the following:  LeMetropole Cafe (http://www.lemetropolecafe.com/) and Shadow Stats (http://www.shadowstats.com/).  Both of these sites, like us, only deliver the unvarnished truth - a rare commodity these days.

Asian Inflation Contagion?

While reported inflation figures in the United States and Europe remain tame, they are exploding in Asia.  As we've discussed in prior blogs, China appears to be in the midst of a property bubble amid booming economic growth.

South Korea and Indonesia reported higher-than-expected inflation this morning, one day after China raised banking reserve requirements in an attempt to cool its overheating economy.  In a sign that inflation is firmly taking root, core prices, which exclude volatile food and energy, are ticking up.

Australia, like China, is experiencing a rapid increase in property prices.

Australia reported today that housing prices rose 4.8% in the 1st quarter from the end of 2009 and are up 20% in its 8 large cities from the year earlier.  The news, which heightened concerns that a bubble has formed there, may forsage a rise in interest rates when the Reserve Bank of Australia meets tomorrow.

Australian propety prices are vaulting upward with a 27.7% annual increase in Melbourne, 21% in Sydney and 15% in Perth.

Asia's economies are running at breakneck speed.  Other indicators released today included positive readings in purchasing managers' indexes in Taiwan, Australia, South Korea and India.   Retail sales in Hong Kong were strong.

South Korea's consumer price index rose 2.6% in April from a year earlier and 0.5% from the previous month.  Core prices rose 1.5% in April from the previous year and 0.2% from March.

Indonesia said consumer prices there rose 3.9% from the year earlier period, while core inflation rose 3.7%. Thailand reported consumer prices rose 3% in April.  Core inflation rose a modest 0.5% from the year before.

Countries experiencing double-digit annualized inflation include India, Turkey and Iceland.

One of the highest inflation readings is being experienced in Vietnam, with inflation exploding at an annual rate of 25% in April.  The only exception in the region is Japan, which continues to be mired in deflation.

So, while the West has not YET seen the full impact of the un-precedented stimulus spending in prices, it will undoubtedly follow in Asia's footsteps, especially in light of the extended period of negative "real" interest rates (interest rates minus inflation). 

With the backdrop of rising world inflation this can only be a major positive factor for GOLD.  We continue to maintain our position that the hyperbolic growth phase for GOLD has begun and leaves plenty of time for investors to get on board.

Marko's Take

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