Watch out: Inflation is headed this way

Middle-class consumers face a summer of discontent as higher prices are poised to pinch pocketbooks.

By InvestorPlace Apr 29, 2014 5:35PM

Image: Groceries © Tetra Images/CorbisBy Anthony Mirhaydari

Economists can talk about annualized inflation rate or month-over-month changes in the Producer Price Index all they want. But these are merely abstract measurements of what every regular American experiences every day: the pain of higher prices.

Most of the time, it's a slow, creeping erosion of the purchasing power of the U.S. dollar that only becomes shocking across the long arc of time. Like when the suits in "Mad Men" get jealous over a $300-a-month salary. But sometimes, like when an ongoing orange crop failure pushed the price of an 89-ounce jug of Tropicana at my local grocery store to nearly $9 this week, the pain is quick and acute.

Especially when you consider that the median full-time inflation-adjusted earnings for a man peaked in the 1970s and have been stagnant ever since.

No wonder one in seven Americans are on food stamps.

But here's the problem: The evidence suggests the pinch on pocketbooks is about to get worse as inflation -- led by food prices and housing costs -- heats up again after a two year reprieve amid a lack of wage growth. Not only will that cause problems for consumers, but it will complicate the Federal Reserve's stimulus efforts as well.

Price pressures are clearly building. The core Producer Price Index jumped in March over February at the fastest rate since 2011, amid the inflation scare driven by the Arab Spring and its impact on crude oil prices. The increase was broad-based, with services prices rebounding.

The Consumer Price Index jumped to a 1.5 percent annualized rate in March -- nearing the Fed's 2 percent target -- due to a big jump in food prices as crops from oranges to coffee suffer from low yields while beef prices are rising on the smallest cattle herd in generations. The problem is poised to get worse as a paralyzing drought in California -- a key producer of a variety of fruits, nuts, and vegetables -- worsens. Drought conditions are now plaguing Texas as well as high plains states including Kansas and Nebraska.

Moreover, one-third of consumer inflation is driven by shelter costs. A drop in the measure back in 2010 is what spurred the Fed to launch another round of bond buying stimulus, dubbed "QE2" at the time. And after holding near a 2 percent annual inflation rate (which is where the Fed wants it), the measure is pushing toward the 3 percent level as the recovery in home prices filters into the government's inflation calculations.

This would all be fine if wages were growing faster than prices, but they aren't: The average hourly earnings of production and non-supervisory employees is expanding at around a 2.5 percent annual rate, well below the 4 percent-plus level seen at the peak of the last bull market and economic expansion in 2006 and 2007.

Should inflation continue to rise into the summer, the economy will suffer as consumers are forced to pull back. And the stock market will suffer with all eyes still on the flow of cheap-money stimulus from the Federal Reserve. Higher prices will limit Fed chairman Janet Yellen's ability to hold off on short-term interest rate hikes until the tail end of 2015, as she desires.

The specter of higher prices could be why investors are starting to move into downtrodden gold and silver mining stocks, such as Newmont Mining (NEM). I've recommended call option positions in NEM to my Edge Letter Pro clients.

More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

Tags: NEM
Apr 29, 2014 5:51PM
Inflation headed this way? It's been here the whole time. Inflation by it's very definition is an increase in the money supply. What do you think QE is? The media needs to stop spewing disinformation propaganda to the public about inflation is in check. The public knows the truth, we shop for food, clothing, health insurance and buy gasoline. You guys need a reality check, I don't know where your editors and columnists shop, but it's certainly not on this planet. STOP REGURGITATING THE GOVERNMENT'S B.S. LIES!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Apr 29, 2014 6:43PM
At some point you might hope that the people who have the money and power, could see that if you don't share the wealth (good paying jobs, higher wages), that at some point the same people you need to buy your goods and services, won't be able to. This is simple econ 101, you can't buy descresionay items (cars, TV's, etc.) if you don'y have the money to do so. Stop importing H1 visa emplyees and hire the citizens already here in the US. Start creating jobs here, the economy will improve, money gets spent and everybody wins. It's not really that hard, we unfortunately just make it that way. Sad really.
Apr 29, 2014 8:50PM
We live in a World where Double Standards are the order of the Day and honesty is RARE. Both parties are Bought and Paid for. Both have allowed the elite, more power then they could have ever imagined. However at the end of the Day, the Average Worker didn't have enough Stones to do anything about it. So what we see now in the end result.

Gasoline prices have jumped at least 40cents per gallon in spite of increasing Supply and dwindling Demand. Consumers are facing the inflation of paying more for less. Smaller packages of lesser quality but higher price.  This has been going on for YEARS.

Workers are being stressed out on their Jobs without any added benefits. Eventually this will led to a major change in the way we do Business. The Elite have been parasites on the Backs of the Working Poor and Fading Middle-Class for Decades. The End Result will be Epic Fail for everyone.

Apr 29, 2014 7:26PM
You think most of us didn't know inflation is on it's way? Most of us have already seen it in the cost of food, utilities, gasoline, and almost everything else people need. Companies can only do so much in cost cutting before they are forced to raise prices to offset rising costs of raw materials and added government regulation.
Apr 29, 2014 7:27PM
"...inflations on the way"?  Prices on most commodities and food has increased 28% since 2008. "On the way" ... surely you jest.
Apr 29, 2014 6:44PM
This is increasing interest rates and  decreasing value of the dollar. Course stagnant wages are as much the culprit as both the former. Could get to the point Americans won't be able to buy Wal Marts Chinese junk due to the increasing prices of the sh!t. Might not be an altogether bad thing.
Apr 29, 2014 8:53PM
Well, DUUUHHH! The Fed and their terrible policies have made the US dollar practically worthless. Inflation is already here - and it's not going away any time soon. Thanks for nothing, Federal Reserve and Imbeciles of DC.
Apr 29, 2014 7:05PM
More good news for Obama.  This is exactly what he wants.  Hurting americans is part of his plan
Apr 29, 2014 6:52PM
we don't need charts to know this shi$ is happening 
Apr 29, 2014 7:00PM
this is what happens when Obama and his choice for federal reserve chairmen print 85 billion a month to prop up the economy and wall st.

All it does is weaken the dollar for everyone else.  But obama is rich, so he doesn't care, he still has plenty and doesn't buy his own food.

Apr 29, 2014 6:27PM
Wow, imagine that prices going higher while Wall Street is getting richer. These Greedy traders especially the oil traders are driving oil higher and higher without any justification and that in turn is making everything that we need to live cost more. If inflation ruins our economy, it is courtesy of Wall Street Pigs.
Apr 29, 2014 7:06PM
Looks like Obama will be calling for people on handouts to get even more money now that inflation is driving up costs. 

Yet those that actually work probably won't see much of an increase, because the economy is also in the tank.

Apr 29, 2014 8:53PM
Should call it hyper-inflation.  It's going to get tough and soon.  Glad I'm debt free.   Nothing's free folks.
Apr 29, 2014 6:21PM

Too easy for Uncle Sam to print paper money.  It's that simple. 

They have been at it forever.  Nothing we can do about it. Most people want a free handout. 

Apr 29, 2014 9:14PM
 Very Good MSN blame inflation on weather yet Trillions of fresh funny Money dumped into the hands of the Elite is not even mentioned as inflationary. Comical stupid dweebs called democrats remain oblivious to the Obozo disaster. Oddly after all the debt and funny money America has record poverty record welfare record food stamps record low percent of Working Americans yet record high Stock price. Yep this is how Obozo and democrats benefit average working people. The Elite get hand outs and you morons get debt welfare and no hope for change. Sure democrats your not brain dead zombies no not at all.
Apr 29, 2014 8:23PM
All inflation is intentionally caused by the government. It is always a give-away to those that hold assets (the rich own 80% of the assets, see stock markets) at the expense of all the others. Since 1913, when the fed began its terror, the dollar has been reduced to about 1/30 of its value in 1913. So, it now costs $30 to buy what cost $1 in 1913.   
Apr 29, 2014 9:05PM

prices of things are not going up, it is the buying power of your dollar going down, caused by the Fed printing dollars and injecting them into the economy

Apr 29, 2014 8:38PM
"57 minutes ago SteelWhatstates,
Companies can only do so much in cost cutting before they are forced to raise prices to offset rising costs of raw materials and added government regulation."

Steel, you do understand that the Government has a Balance Sheet of over $4Trillion specifically done so that Companies can borrow at almost Zero Percent while also taking advantage of Slave Waged Labor overseas. Meanwhile Workers here are asked to do Far More for Far Less.

Cost cutting is done to punish American Workers while transferring those same job OVERSEAS. The Global Push of this Right to Work Harder for Less in destroying Consumers Globally. The Result is Record Global Poverty while at the same time Record Global Wealth. Yet we continually hear Folks crying about how bad the Elite have it. Really?

Apr 29, 2014 7:14PM
"No wonder one in seven Americans are on food stamps".

Did someone at InvestorPlace (Anthony again) really post this without examining the demographics of the entire American population before daring to make this statement? We might have been better served by a columnist such as he by suggesting a solution to the situation rather than simply creating another headline! Anthony, can you use your talent to tell the six out of seven remaining "Americans" as you put it, how to stay off food stamps? I realize this will be a tougher task but maybe you might consider this. I await your next InvestoPlace column. Regards!

Apr 29, 2014 7:15PM
The Republican budget will help everyone get rid of the democrats and the world will be better.

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