Most investors / readers know about inflation -- an increase in the price of a good or service not connected to an improvement.
But fewer know about its flipside -- deflation -- a decline in prices.
Moreover, while inflation is a serious problem -- it erodes purchasing power and makes it hard for businesses to project and plan for costs, moving forward- - deflation is an even bigger menace.
That's because deflation decreases the amount of money flowing to businesses for their products/services, reducing the money needed to keep commercial activity alive and the economy growing.
Deflation: a danger sign
Don't misunderstand: a price cut after a company becomes more-efficient, or implements a 'holiday or promotional' sale, is fine. Deflation is different: it's pervasive price cutting and asset price declines -- falling prices across the product/service spectrum -- usually driven by a lack of consumer / wholesale demand.
Further, if deflation persists it can, you guessed it, lead to lay-offs. Companies and factories with lower revenue and demand for their products / services scale-back production to reduce expenses by laying-off employees. Those laid-off employees then cut expenses as they search for new work assignments by cutting spending, resulting in even lower demand for products, further price cuts, and lower company revenues, and a vicious cycle can ensue.
A basket of 16 basic food items costs $48.68, up 10.5% from a year ago, the American Farm Bureau Federation said in a press release that marketwatch.com covered on Friday.
Economist David H. Wang told BloggingStocks Friday many factors are driving grocery prices higher, including higher ingredient costs, higher energy prices, and rising demand for food in developing countries around the world (especially China, India, Russia, Brazil, and the Middle East).
A few grocery store tips:
Wang says that while there are many savvy shoppers in the states, many others are new to shopping. Wang, who worked in a grocery for three years while in college, offered his tips on how to lower your grocery bill:
Stick to a shopping list and shun 'impulse' buys: Wang says this is perhaps the biggest money saver. "From the moment you walk in the store, grocery stores are designed to get you to buy more items than you plan to buy," Wang said. "You are bombarded with stimuli that tempts you to spend, and it works, so stick to your list. If it's not on the list, ask yourself if you need the item, or are buying merely on impulse."
Coupon card: Most grocery chains offer a coupon card that automatically deducts for items on sale. Sign up for one and use it. But evaluate the coupons some cash registers dispense with a sales receipt. "Ask yourself if you need it or if it is on your list," Wang said.
Evaluate buying in bulk. "Buying larger sizes usually lowers cost per food purchased but ask yourself if you will need and use the item," Wang said. "If the item is not your list, don't buy it, as you could be succumbing to an impulse buy, which will drive your food bill up."
So much for the slower global growth story dictating the price of oil.
Oil rocketed up more than $10 to $115 Monday after traders concluded that the U.S. Government's bailout to stabilize the financial system will both increase U.S. borrowing and inflation, and many also stimulate the U.S. economy.
"This market is wild, just wild," Energy Trader Jim Dietz told BloggingStocks Tuesday afternoon. "Everyone's throwing the slower global growth story out the window right now and seeing only more dollars out there from the [U.S.] Treasury." Dietz added he was currently long with oil and heating oil, with monthly contracts.
Oil rose $10.70 to $115.25 per barrel in heavy trading. Earlier today, oil trading in the electronic portion of trading, but not in the open outcry portion, was suspended for 5 minutes after it reached 10% move limit.
The other, major energy commodities also jumped Tuesday afternoon. Unleaded gasoline rose 10 cents to $2.69 per gallon, heating oil climbed about 17 cents to $3.06 per gallon, and natural gas gained 11 cents to $7.65 per million BTUs.
Oil surged back over $100 Friday after traders sensed the U.S. Treasury / U.S. Federal Reserve's plan to stabilize the financial markets by buying-up distressed / bad mortgage debt could very well boost inflation, increasing the attractiveness of oil as an inflation hedge.
Oil rocketed up $4.91 to $102.79 per barrel Friday morning. The other major energy commodities also jumped Friday. Unleaded gasoline rose 9 cents to $2.57 per gallon, heating oil climbed about 10 cents to $2.88 per gallon, and natural gas gained 11 cents to $7.72 per million BTUs.
Energy Trader Jim Dietz told BloggingStocks Friday slowing global economic growth that's likely to slow the increase in global oil demand is the oil market's long-term concern, but short-term the focus is on inflation.
"I haven't seen the details of the [U.S.] Government's plan yet but there's three ways we can pay for it. We can increase government spending, print money, or sell government bonds," Dietz said. "The first two can increase inflation quickly, the last one, not as quick, but either way, there will be some increase in inflation, which is why traders are buying oil. Inflation now will jockey with global growth concerns to determine the direction of oil's price."
There is an often-repeated joke in economists' circles that goes: Inflation is low, if you exclude food and energy prices. And of course, no one buys food or energy . . .
The above is a critique of the U.S. Federal Reserve's use of core inflation -- which excludes food and energy prices -- as a measure of lasting price changes in the U.S. economy.
Critics charge, "inflation is the sum of all products / services consumers use, not solely a portion." In essence, they argue that the Fed is underestimating inflation, creating a distorted picture of price conditions people face daily.
In other words, core inflation is used by the Fed because it has been deemed a more-accurate predictor of long-term price changes or 'inflation over time' than total inflation, sometimes also referred to as 'headline inflation.'
Economist David H. Wang said he's by-and-large in agreement with Kiley's conclusions. "Core inflation is more indicative of long-term price changes. The problem occurs when you have periods of large price changes in food and energy, such as today, which pushes total inflation way up. Then the cry occurs that the Fed is not measuring inflation accurately," Wang said.
Even with the stimulus checks, retail sales numbers for June and July have been nothing to cheer about. And this coming week should provide another look at how things have been shaping up in the apparel and accessories arena. A number of companies are scheduled to release quarterly numbers, from upscale retailer Nordstrom to the parent of discounter TJ Maxx, from hipster Urban Outfitters to global giant Wal-Mart. Here's a look at what Wall Street is anticipating.
Analysts surveyed by Thomson Financial expect the following to report strong earnings growth when compared to the same period of the previous year.
The lowdown on the high and rising U.S. budget deficit for investors and readers? A triple whammy: higher prices for imported goods, higher interest rates, and higher taxes, among other negative consequences.
The budget deficit is expected to increase to $490 billion in Fiscal 2009, which begins October 1, 2008, Bloomberg News reported Monday. The increased shortfall is due to a worsening U.S. economy, which lowers government receipts, and spending increases for the wars in Iraq, Afghanistan and the housing bailout, among other spending responsibilities.
Increased spending to pay for the housing bailout, including assistance for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) will further increase U.S. Government borrowing, and the supply of dollars, "which almost guarantees that the dollar will fall more," so says currency trader Andrew Resnick. As a result, companies exporting goods to the U.S. are likely to raise their prices, a cost increase Americans will feel keenly.
However, Resnick said the dollar is likely to fall less, if the U.S. government increases taxes or the Fed increases short-term interest rates.
Economists surveyed by Bloomberg News had expected May consumer prices to increase 0.5%. Consumer prices increased 0.2% in April 2008.
Also, the core rate, which excludes the volatile food and energy component, rose just 0.2%, in-line with the 0.2% Bloomberg News survey consensus estimate. Core consumer prices increased 0.1% in April 2008.
On a year-over-year basis, consumer prices have risen 4.2% and the core rate has risen 2.3%. The core rate remains slightly above U.S. Federal Reserve's 'comfort zone' for inflation. The Fed uses the core CPI rate as one of its primary gauges of consumer-based inflation.
Also, consumer prices have risen at a 4.9% rate in the last three months -- another sign of oil-fed inflation working its way into the U.S pricing system. Inflation is now a primary concern for the U.S. Federal Reserve, overtaking fears of further economic slowing.
Consumer prices rose 0.2% in April 2008, the U.S. Labor Department announced Wednesday, a statistic below the consensus estimate as oil prices moderated during month, offsetting rising food prices.
Economists surveyed by Bloomberg News had expected April 2008 consumer prices to increase 0.3%. Consumer prices increased 0.3% in March 2008.
Also, the core rate, which excludes the frequently-volatile food and energy component, rose just 0.2% in April 2008, inline with the Bloomberg News survey 0.2% consensus estimate.
On a year-over-year basis, consumer prices have risen 3.9% and the core rate has risen 2.3%. The core rate remains slightly above U.S. Federal Reserve's 'comfort zone' for inflation. The Fed uses the core CPI rate as one of its primary gauges of consumer-based inflation.
April 2008 CPI: 'Surprisingly tame'
Economist David H. Wang said the April 2008 CPI report was a bit of a surprise -- one that may help the U.S. economy. "The report was surprisingly tame. We do see rising food costs, but the energy component was not as bad as expected," Wang said. "Also, core year-over-year inflation is not too bad, and the Fed [U.S. Federal Reserve] will look favorably upon this, if it remains moderate."
U.S. inflation at the retail level rose 0.3% in March, after almost no increase in February, the US Department of Labor reported.
Meanwhile, the core CPI rate, which excludes the volatile food and energy components, rose 0.2%.
Economists surveyed by Bloomberg News had expected the CPI and CPI core rates to increase by 0.3% and 0.2%, respectively in March 2008.
In March, energy prices increased 1.9%, medical care rose 0.4%, food prices rose 0.2%, clothing increased 0.2%, and education and communications costs increased 0.2%.
For the 12 months from March 2007 to March 2008, prices have increased 4.0%, compared with a year-over-year gain of 4.0% from February 2007 to February 2008. The core rate increased 2.4% from March 2007 to March 2008, after a 2.3 percent year- over-year gain from February 2007-February 2008.
Euro-zone inflation hit a new record annualized rate of 3.3% in February 2008, the the E.U.'s Eurostat office announced Friday, as surging oil prices began to feed through the price system. (pdf)
The 3.3% annualized rate represent 0.1% increase from the previous estimate of 3.2%, which was also a record. The euro-zone is a 15-nation region that uses the euro currency.
The core rate, which excludes the often-volatile food and energy costs, increased at a 2.4% annualized rate.
In February 2008 energy prices increased an alarming 10.4% on a year-over-year basis, Eurostat said, while food and transportation costs rose 5.8% and 5.4%, respectively, on a year-over-year basis.
Economic Analysis: The February 2008 statistics indicate that euro-zone inflation is beginning to show the effects of surging oil prices. Increased energy efficiency, a lower per capita energy use rate, and a rising euro had heretofore been able to diffuse the rise in energy costs, particularly oil, but oil's relentless march higher finally enabled energy costs to filter through to the economy.
Further, retail inflation is above the European Central Banks target of just below 2%. If the core rate continues to rise, that will make it harder for the ECB to cut benchmark, short-term interest rates to stimulate Europe's economy, which is likely to slow this year, due to the U.S. economic slowdown.
Consumer prices unexpectedly remained the same in February 2008, the U.S. Labor Department announced Friday, as fuel costs dropped, helping retail inflation take a breather.
Also, the core consumer price index rate -- which excludes the often-volatile food and energy categories -- also was unchanged.
Analysts surveyed by Bloomberg News had expected the full rate and the core rate to increase by 0.3% and 0.2%, respectively. Consumer prices increased 0.4% in January 2008.
In February 2008, energy costs fell 0.5%, transportation costs fell 0.7%, new car prices dropped 0.3%, drug prices rose 0.1%, rental costs food gained 0.4%, apparel costs fell 0.2%, and medical care costs rose 0.1%.
Year-over-year, CPI is running at a 4% rate; the core rate, 2.3%.
Economist Steve Affinito said the core rate will make it easier for the U.S. Federal Reserve to continue to lower interest rates to stimulate the U.S. economy, in the midst of its worse housing slump in more than 15 years, with accompanying credit market stress. "This is a really encouraging core number," Affinito said. "It's a sign that price pressures in commodities are not showing up at retail level as fully as expected."
Inflation: "An increase in the amount of money and credit in relation to the supply of goods and services; An increase of the general price level; An excessive or persistent increase in wages and costs causing a decline in purchasing power."
Recession: "A temporary falling off of business activity during a period when such activity has been generally increasing."
(Source: Websters New World Dictionary, Third College Edition)
Rather than an opinion piece, which is what I generally write, this little snippet is meant more as a discussion generator than a statement of my own economic view. I earnestly invite our readers to weigh in on the matter. Inflation or recession, are we now experiencing either or both?
U.S. Federal Reserve Chairman Ben Bernanke's signal, in a speech Thursday, that more interest rate cuts are on the way, should not cause Congressional officials to be less lax regarding fiscal policy stimulus, economists and analysts told BloggingStocks Thursday.
"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke said in a speech before a business group in Washington. Bernanke added that, "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."
In a choppy (or perhaps worse) market, it doesn't hurt to own a stock or two in which global trends are running in the company's favor. With that in mind, Barrick Gold is worth an evaluation.
Barrick Gold (NYSE: ABX) is the world's No. 1 gold producer, including 2006 production of 8 million ounces, and 120 million ounces in proved and probable reserves. Analysts see a 14-17% revenue gain in 2008, following a solid performance in 2007, with a higher average gold price.
What's driving the gold bull market? Three factors: increased use of gold in industrial and commercial applications, impressive jewelry demand, and increased reliance on gold and gold shares as an alternative investment. All three trends are global in scope and show little signs of abating in 2008. Asia-based jewelry demand looks especially promising in the immediate years ahead. The Reuters F2007/F2008 EPS consensus estimates for ABX are $1.51/$2.17.
Most investors / readers know about inflation -- an increase in the price of a good or service not connected to an improvement. 
Oil surged back over $100 Friday after traders sensed the 
Even with the stimulus checks, retail sales numbers for June and July have been 
Consumer prices rose 0.6% in May, above the consensus estimate, 
U.S. inflation at the retail level rose 0.3% in March, after almost no increase in February, the 
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