Gas prices are just the beginning

New data shows serious inflation is coming. With wages stagnant, that's terrible news for the economy.

By Anthony Mirhaydari Mar 1, 2012 4:51PM

Change is in the air. Over the last few months, the economic data has been consistently surprising to the upside thanks to temporary drivers like shoppers dipping into their savings and businesses restocking inventories, helping power stocks higher. This, in turn, has boosted consumer and business confidence back to recovery highs -- levels not seen since last summer.  


Now, "hard data" based on output and activity, not survey forms, is confirming my pessimistic outlook. The main culprit: Rising prices, especially on crude oil (nearing highs seen last spring) and gasoline (up nearly 40% since November). What makes higher inflation so dangerous is that not only does it tie the hands of the Federal Reserve and other central banks -- who have almost single handedly engineered the post-November market rally -- but it will pressure consumer spending.


That sets the stage for pitiful GDP growth in the months to come, something investors are just beginning to prepare for. Here's why.


Just look at the data released this week. On Tuesday, it was reported the consumer confidence index jumped well over expectations to 70.8 (vs. consensus estimate of 64 and prior month 61.5) thanks to a positive jobs outlook.


But then today, we learn that for the second month out of the last three that inflation-adjusted wages actually fell on a year-over-year basis. That hasn't happened before in a non-recession environment. And it represents serious pressure on shoppers trying to rebuild savings accounts after splurging on holiday shopping.


This is happening as the massive monetary injections by the central bankers are pushing prices higher and higher yet are doing little to encourage real, sustainable economic growth. The unemployment rate is falling because people are giving up looking for work. And those that are finding jobs are largely finding temporary, low-wage, no-benefit, part-time positions.


Real measures of the labor market, such as the percentage of the population in full-time employment, has returned to recessionary lows.


The inflation problem is increasingly global. And it's about to get worse. (For more on inflation, and how the Federal Reserve is causing it, be sure to check out my column this week here.)

That's the takeaway from today's ISM manufacturing report. Its priced paid sub-index jumped to 61.5, up from a low of 41 back on October. Any reading over 50 indicated month-to-month growth.


Yet the new orders component fell to 52.4, dropping below last October's levels.  Stagflation, anyone?



As for the global outlook, the JPMorgan Global Manufacturing PMI has leveled off just above contractionary territory and has returned to levels last seen in 2008 as the economy was falling into the deep end.


For investors, I continue to recommend a cautious approach that focuses on precious metals and opportunistic short positions in economically-sensitive sectors like basic materials and semiconductors. Chip stocks are weakening noticeably as traders start to worry about the impact higher inflation will have on overall growth. The Semiconductor Holders (SMH) is on track to close below its 20-day moving average for the first time since December.


That means big gains lie ahead for the ProShares UltraShort Semiconductors (SSG) as well as individual short play Marvell Technology Group (MRVL). I am adding both SSG and a short in MRVL to my Edge Letter Sample Portfolio.


I found both SSG and MRVL with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.



Mar 2, 2012 7:22AM
The Feds with their free money at the fed window is the biggest problem we have ! Devaluing the US dollar is not good ! There is no incentive in the USA to save ! CDs int rates are a joke and housing values that most Americans have their wealth in is gone ! The 30 yr treasury note does not even pay 2% ? So i say the FEDS and the BEN is leading us down the path of hyperinflation ! All this is adding to higher energy costs ! The FEDs need to raise int rates to at least 1.5% ant the fed window to ease the fall ! Propping up stocks is all this QE BS has done ! And wall street is not running on sound investing principals like supply and demand ! Its all filled with cheap inflated money ! Bens playing a dangerous game and the working man and the TAXPAYERS are the ones that going to get screwed !
Mar 1, 2012 5:30PM
Rigt on, right on. If gas prices are $5.00/gal by election Obama is dead meat!!!!! And so is most of congress.
Mar 2, 2012 3:42AM
Anthony's facts about where the markets should be headed are accurate. The problem is, the "easy money" is preventing it from happening. Sooner or later, people will figure out that you cannot re-inflate a popped bubble. Unfortunately, it will take another round of catastrophic losses in the market for most people to realize that. 
Mar 2, 2012 3:06PM

The prices of pretty much everything else we consume are skyrocketing. It only stands to reason the gas prices would skyrocket as well. And the higher the gas prices go the higher all the other prices will go. Recovering economy? Yeah, right!

Mar 3, 2012 1:06AM
Post # 57   Right after gas price, is milk and butter, wheat and bread products, produce, and eggs. Clothing, meats, shoes, and plastic products including paint and many home construction products. We wait for electric Kwh increase because Utilities have to ask different control groups to allow the increase. This last increase will take Americans to a place we have never been before. BROKE and unemployed, planting gardens, riding bikes, small motorbikes, walking a lot more, eating road kill, and hunting food for our tables. If we allow 1% or the people to control 100% of our oil fuel production, we are doomed for dark ages again. IMHO
Mar 3, 2012 7:03AM
At $4 gasoline, this shuts off most people from any descrectionary spending.  People will travel less, far less and spend far less (they won't have it to spend).  It takes about 4 to 6 months for the effects to slam into the economy.  With high fuel costs this spring and summer it means the mythical recovery statistics will eventually nose dive.  Since we never recovered from the last nose dive, the economic pain will cause a spiral downward effect.  Inflation, defaced currency(devalued dollar means commodities cost more) deflationary real asset values, increased costs due to inflation(higher expenses), can you see the picture.  I expect hyper inflation, further deflation in real estate, which can be actually called stagflation.  Eventually, monetary policy makers will realize kicking the can is no longer possible.  Remember a year ago, the Federal Reserve indicated it had more tricks in its bag to help economic recovery: this was called quanititive easing.  The tricks were bad magic acts.   

Due to recent budget cuts and the cost of electricity, gas and oil, as well as current market conditions and the continued decline of the economy, The Light at the End of the Tunnel has been turned off.

We apologize for the inconvenience.

Mar 2, 2012 3:42PM

It's too bad the U. S. Government DOES NOT factor the RISE IN FUEL and FOOD COSTS when they determine how much TRUE inflation has gone up!! I find it very convenient these two items are purposely omitted especially when senior's and disabled people have not received a COLA for two years PRIOR to the START of THIS YEAR!


Hey OBAMA, you've killed about 1 MILLION tress worth of paper, writing USELESS Executive Orders since you sat your lame **** behind the desk in the Oval Office, why don't YOU do something RIGHT for a change and issue an Executive Order that DEMANDS the price of FUELS  AND FOOD by inserted into the equation when figuring out the REAL COST OF INFLATION. That whopping $23.00 per month COLA I received in my first Social Security check in January of this year is already been chewed up by the OUT OF CONTROL INCREASE IN GASOLINE COSTS!!!!!! YOU REFUSE TO USE OUR GOD GIVEN RESOURCES HERE TO HELP KEEP GAS PRICES DOWN!!


Why am I using the word "GOD" when speaking of OBAMA?? OBAMA omits the word "GOD" ON PURPOSE EVERY TIME HE RECITES THE U.S.CONSTITUTION!! It's pretty bad when the president of this once proud and mighty nation does not even GO TO CHURCH!!!


 WAKE UP AMERICA, FIRE OBAMA IN NOVEMBER THIS YEAR FOR SURE!!! The "Food Stamp" President cannot hold us good abiding "We The People" hostage another FOUR YEARS!! OBAMA WILL RUIN THIS COUNTRY FOR SURE IF GIVEN THE CHANCE!!

Mar 2, 2012 10:09PM
Its the oil companies raising the price. We have no shortage, we have excess and demand is down in the US. They're selling it to other countries and they're buying it because its still the cheapest gas in the world.

So matter how much you cut back or drive less or buy a economy car or Hybrid, they will still keep the price up there. They get US subsidies courtesy of the tax payers, drill it in the US back yards and US waters then turn traitor and sell it to the highest bidder.

They suck the life blood out of this economy and country to stuff they're own pockets with dollars.Showing record profits continously in a failing economy. They could care less about the US economy or how bad it will get for the citizens. They just as well sell secrets to the North Koreans because its "Economic Sabotage " for monetary gain. Its Treason and everyone of them should be shot or hung for it.

Mar 2, 2012 10:29AM

Welp, even Helicopter  Ben thinks the GDP is likely to remain "tepid".  After three plus years of trillion dollar deficits, and stimulus after failed stimulus, we now have the bill coming due for all the SPENDING we could not afford. The interest on this spending will now exceed the defense budget.  The real problem is we recieved almost no value for any of it.  Hence the parties over and now we have two choices...  Huge tax increases on EVERYONE to pay for the drunken bing, or Helicopter Ben printing us out of debt (i.e. punish savers, reward debtors).


I am expecting much higher inflation.  Gas prices may even exceed $6 by this time next year.  


This is the change the Donkeys promised...  Tell them your solution in November...

Mar 2, 2012 2:29PM
The media keeps saying "be prepared for $5 a gallon fuel". The media primes the public, and viola! pretty soon you're going to see $5 a gallon fuel - why not, the media has already alerted us!

Why wouldn't the speculators, and anyone else who stands to profit, not take advantage of the media opening the door in our minds to this possibility?

Wonder what it would cost if the media kept their pie holes shut?

I can read MSN one day, and hear that stocks are up, and the economic recovery is in full swing because of a rosy employment picture, and the next day, hear the exact opposite-unemployment numbers are up! Which is it? does it change that fast - less than 24 hours?

How about some truthful numbers, say like; how many people's unemployment checks have run out and don't have work, so aren't no longer figured in with the unemployment data? Underemployed individuals etc.?

Make up your friggin' minds, or do you not really know?  if you don't, keep your mouths shut.
Mar 2, 2012 4:07PM
545 vs. 300,000,000 People
-By Charlie Reese

Politicians are the only people in the world who create problems and then campaign against them.
Have you ever wondered, if both the Democrats and the Republicans are against deficits, WHY do we have deficits?

Mar 2, 2012 1:52PM

Gas prices go up weekly and all they do in Washington is conduct business as usual, forgetting about every day folks who have to take more out of their budget to pay for the damn gas!


Obama and others........wake up............start drilling for oil in this country.   End the subsidies for Big Oil,  fine them for price gouging, regulate them and do the same for the crooked speculators!!!


It's time to take this country back from the crooks in Washington and Big Business who train their puppets in Congress to do their bidding!!!

Mar 3, 2012 8:39AM
Where is the outrage on the part of the Democrats when prices spiked it 2008 they were all over President Bush at the time about not taking any action to lower prices. But all we here now is there is nothing President Obama can do about it and we have an energy Secretary that just an academic and has never lived in the real world and has no concern for the average person. I have no my own ideas on what could be done to cure this problem but any action would be better that none. And don't tell me it's the Iranian problem we haven't bought fuel from them in years and as for world supply  well we are shipping crude and finished product out of the country while our prices rise but again nothing can be done. Please don't insult the average Americans intelligence just because we all did not go to Harvard dose not mean we can't understand what's happening.
Mar 3, 2012 11:13AM
I have been saying all along, that this big jump in the market is not real. Wall Street will get their huge bonuses, but the working class is still hurting. So you take a job at less than you used to make, then inflation and gasoline take so much out of your pocket that it really is a false high we were on. If Obama or any of the Republican Talking Heads don't take action soon, depression will settle in. I don't care what the big money banks and government tell us, we are going to pay for their mistakes. They will take their huge salaries and bonus' and laugh at us as we struggle to feed our families. IT IS SICKENING.
Mar 2, 2012 2:34PM
Inflation numbers like unemployment numbers are a joke ! They are not accurate .They truly do not have real stats . To exclude energy and food (i.e core and non core ) does not make for an accurate stat! But then if the feds did use accurate stats inflation would be over 50% and unemployment would be over 25% . It funny how they count unemployment? They only count people who made apps in the last 90 days ! They do not count people who collect beyond that ? Or people who exhausted or were denied their benefits! LOL This is what wall street is running on  . LOL And the DO NOTHING CONGRESS of the USA needs to be fired!  It shows that they are truly the best congress wall street can buy. They only need Americans votes in november ! The rest of the time they work for the lobbyist! Only in the USA baby.
Mar 2, 2012 1:11PM
Give me a friggen break, how much more inflation can we take??
Mar 2, 2012 6:50PM

We all talk about oil but, it is truly a quagmire.


I did a bit of research and was shocked how little I know.


A barrel of oil-how much is that????

There are 42 gallons in a barrel of oil-not as I had thought 55 gallons as in most chemical drums-so at say 106 a barrel, crude costs $2.52 a gallon not $1.92 a gallon.  With our government adding about 1/3 in taxes to every gallon of gasoline you buy it is amazing that gasoline can be sold at $4.00 as it needs to cover refining, labor, transportation and profit.  NO I DO NOT WANT TO PAY MORE. 


We hear that the price of oil has gone up because of issues in the middle east-how much of the oil that the United States uses comes from the middle east?

We get about 20% of the oil we import from the middle east.  Most of the oil we import comes from Canada and Mexico and we do not pay the price quoted for Brent oil.  The reason is that the oil form Canada and Mexico is a lower grade, does not produce as much gasoline and diesel and it has sulfur in it that has to be removed adding to refining cost.

Does anyone but me wonder, as I do, why the United States is paying for most of the wars in the middle east and doing most of the dying?


We criticize Obama for putting down the oil pipeline to bring shale oil from Canada. 

Perhaps, this is the most bizarre.  WE TO HAVE SHALE OIL IN THE UNITED STATES.



They used to post on the pump what you are paying for the gasoline and what the tax per gallon is.  Our government is happy to have you scream at the middle east.  Scream at the evil oil companies.  BUT, OUR GOVERNMENT ADDS ABOUT 1/3 TO THE COST OF EVERY GALLON OF GASOLINE THAT YOU BUY IN THE FORM OF TAXES.


To me, it is quite clear that we are being manipulated.


Mar 2, 2012 2:55PM

With the two morons Obama & Bernache increasing the money supply by 34% the  last 3 years how could there NOT be inflation of at least that amount?  


Last year, these idiots increased M2 by 10.7%!   Have you been to the Grocery Store?  The gas station?  Home Depot?  A clothing store?   Inflation is rampant everywhere but housing.  


Look at your damn tax bill lately?   Talk about inflated...


I recommend you all think about these two morons when you go and vote in November.

Mar 2, 2012 3:35PM
I just read all the posts.  Some were nonsense some where very good.  What amazes me is when the obvious democrats blame the republicans for things the dems did and they call for dems to be elected.  All that will do is allow the dems to keep screwing things up so they can keep blaming the republicans.  WAKE UP.
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