22% Food Inflation = middle class destruction

[jem]

Progressive taxing and spending like crazy are the root cause of income inequality.
The left is destroying tax payers standard of living with their sick, destructive policies.


http://www.breitbart.com/Big-Government/2014/05/24/U-S-Food-Inflation-Running-at-22


U.S. FOOD INFLATION RUNNING AT 22%

After five years of the federal government telling the public that despite a $3.5 trillion increase in monetary expansion, the inflation rate is below +2%, the Department of Agriculture (DOA) just warned the American public that the consumer price index for food is up by 10% this year.
The DOA tried to blame food inflation on the drought conditions in California, but last year’s drought was worse and food prices fell by -6%. The real problem is Federal Reserve monetary stimulus is stimulating inflation. I reported in "Food Price Inflation Scares the Fed” two months ago that commodity food costs were exploding on the upside. Given the lag in commodity costs impacting prices on grocery store shelves, annual U.S. food inflation is now running at +22% and rising.

 

[Tsing Tao]

Progressive taxing and spending like crazy are the root cause of income inequality.
The left is destroying tax payers standard of living with their sick, destructive policies.


http://www.breitbart.com/Big-Government/2014/05/24/U-S-Food-Inflation-Running-at-22


U.S. FOOD INFLATION RUNNING AT 22%

After five years of the federal government telling the public that despite a $3.5 trillion increase in monetary expansion, the inflation rate is below +2%, the Department of Agriculture (DOA) just warned the American public that the consumer price index for food is up by 10% this year.
The DOA tried to blame food inflation on the drought conditions in California, but last year’s drought was worse and food prices fell by -6%. The real problem is Federal Reserve monetary stimulus is stimulating inflation. I reported in "Food Price Inflation Scares the Fed” two months ago that commodity food costs were exploding on the upside. Given the lag in commodity costs impacting prices on grocery store shelves, annual U.S. food inflation is now running at +22% and rising.

While I am certainly a big believer in food inflation and the fact that the government massively under reports it, this article has quite a few things incorrect. For example, droughts and other natural events that boost food prices require a good deal of time to run through the producer/consumer supply chain and end up in the form of price increases. So the drought being worse last year is just coming to bear now (and this year's continuation of the drought will follow through for some time to come).

The majority of food inflation is not currently due to direct Fed stimulus, as most of that money is being left in reserves. I'm not saying the bidding up of asset prices (commodities included) isn't driving inflation - it is, and that IS the Fed's fault. But you ain't seen nothin' yet. If those reserves ever begin to be lent out and make it into the greater economy, the explosion of inflation will make the late 70's early 80's looks like a minor price fluctuation in comparison. The Fed won't be able to stop it, short of nuking the economy (what's left of it) and they know it. They are helpless and relying on hope.

 

[jem]

I am not sure I buy the argument that QE does not cause inflation.
Almost by definition it is inflationary as it was thought of as a deflation fighting tool.
It allows the govt to spend much more money that it should have. (bill gross once said who will buy those bonds. Its hard to say if the bonds would have sold if the Fed was not buying them, supporting the market.)
By replacing bonds and assets which would have or could have been worthless with reserves created out of thin air... you allowed larger banks to do things which caused prices of things to inflate... from stocks to commodities.

I am sure I could think of other things... if I spend the time.
Such as the impact of keeping zombie banks alive.... that has to be massively inflationary.

 

[Tsing Tao]

I am not sure I buy the argument that QE does not cause inflation.
Almost by definition it is inflationary as it was thought of as a deflation fighting tool.
It allows the govt to spend much more money that it should have. (bill gross once said who will buy those bonds. Its hard to say if the bonds would have sold if the Fed was not buying them, supporting the market.)
By replacing bonds and assets which would have or could have been worthless with reserves created out of thin air... you allowed larger banks to do things which caused prices of things to inflate... from stocks to commodities.

I am sure I could think of other things... if I spend the time.
Such as the impact of keeping zombie banks alive.... that has to be massively inflationary.

Let's step back for a second and review the two types of inflation: Cost-Push, and Demand-Pull.

Demand-Pull is essentially too much money chasing too little goods. There's not too much money in the economy, because the Fed has no direct mechanism to getting the money it prints into the hands of consumers. The best it can do is get that money iin the hands of banks, which have to lend to consumers. If the banks don't lend, or if there aren't enough willing (and credit worthy) consumers looking to borrow, then money sits in reserves and goes no where.

Well, almost no where. Right now, in our silly banking system, it can be used to drive up asset prices in the capital markets. Banks can buy crude, or wheat, or land, or stocks, or whatever with capital. Speculating on these asset prices, companies that have to buy crude, or wheat, or beef or whatever end up having to pass these costs on to consumers in order to maintain margins. Hence, what we see now is Cost-Push inflation.

Typically, Cost-Push inflation is more gradual (think boiling a frog) than Demand-Pull. But it is also much more difficult to get under control, because companies are quick to raise prices, but loathe to lower them as they fear margin contraction (they do not believe costs, even if they drop, will stay down for long).

So can QE cause inflation? Yes, it is possible that QE can be the underlying factor behind inflation. But with reserves as the home for much of the printing, it's not driving factor - yet.

 

[jem]

very thoughtful analysis. excellent description of some of the cost push.

with respect to demand pull.
what about all of the govt overspending and money it puts in the hands of those not working. people who would have had much less to spend... with fewer people competing for pasta sauce the price would not be as high.
inflation would go down and 10 an hour jobs would be more useful to have.

 

[Tsing Tao]

very thoughtful analysis. excellent description of some of the cost push.

with respect to demand pull.
what about all of the govt overspending and money it puts in the hands of those not working. people who would have had much less to spend... with fewer people competing for pasta sauce the price would not be as high.
inflation would go down and 10 an hour jobs would be more useful to have.

Fiscal Policy (government spending) can certainly drive inflation, but unless there is a net positive between it and other deflationary forces, you're not going to get inflation out of it (it can really only bring Demand Pull).

 

[jem]

well my thesis and the thesis of many others (maybe your thesis too) is that the govt is rigging the stats and the reality is we have had massive inflation in the long run and short run. China and the housing crisis might have tempered that inflation for a few years... but that we have had the return of big inflation for the last few years in food, energy, services rents, housing and commodities we actually consume starting 3 or 4 years ago.

So in short my thesis is that the demand pull of crazy govt spending which could not have happened without the Fed buy bonds is highly inflationary.

Fiscal Policy (government spending) can certainly drive inflation, but unless there is a net positive between it and other deflationary forces, you're not going to get inflation out of it (it can really only bring Demand Pull).

 

[Tsing Tao]

well my thesis and the thesis of many others (maybe your thesis too) is that the govt is rigging the stats and the reality is we have had massive inflation in the long run and short run. China and the housing crisis might have tempered that inflation for a few years... but that we have had the return of big inflation for the last few years in food, energy, services rents, housing and commodities we actually consume starting 3 or 4 years ago.

So in short my thesis is that the demand pull of crazy govt spending which could not have happened without the Fed buy bonds is highly inflationary.

I agree with you that the government is not correctly reporting inflation (either through choice or incompetence). But there is little to no demand-pull as a result of government spending because of massive deflationary forces (because of lost jobs, lost investment, etc). And even if there were, this would not be as a result of QE unless the dollars were leaving the banks and going into the greater economy, which they are not.

So I will agree with you that there is inflation. But the underlying reasons of it are, in my opinion, different than you thesis.

 

[jem]

thats fine our conclusions may be different and my is still forming... but
the govt spending goes into the pockets of govt workers, welfare, section 8, unemployment, food stamps, retirements etc.

but here is part of the thought....

over the last 20 years... govt workers went from 20 to 30% lower pay than the private sector to relatively overpaid plus massive retirement.

Cops and teachers now live all but the top crony neighborhood. They use to be middle class or lower middle class earners.

Some govt contractors... are now living large as cronies. Govt contracting is a a place where some people make fortunes.

Our overspending govt... is forcing the hard working tax paying parts of the economy to massively compete for rents, homes, food etc.
its part of what is driving up prices.

govt employees do not even have to save for retirement.

I agree with you that the government is not correctly reporting inflation (either through choice or incompetence). But there is little to no demand-pull as a result of government spending because of massive deflationary forces (because of lost jobs, lost investment, etc). And even if there were, this would not be as a result of QE unless the dollars were leaving the banks and going into the greater economy, which they are not.

So I will agree with you that there is inflation. But the underlying reasons of it are, in my opinion, different than you thesis.

 

[Tsing Tao]

Ok, but you're bringing up multiple points across a variety of topics. It sounds as though you're laying the country's ills - all of them - at the foot of the Fed.