Inflation Nation...
Thursday, April 17, 2008 | Jason JovineRating:
I stopped the other day to fill up my gas tank and Regular Unleaded (87) was $3.46 per gallon!!! Boy, have gas prices gone up. Quick inflation story…
I remember one day, back in New York when I worked at 100 Wall Street, I had my assistant run down to the local bodega and get a tuna fish sandwich on a roll for me.
Like many stores in New York City, the owners - let’s just say the owners are extremely shady and change their prices every single day - participate in what economists call "price discrimination."
In other words, they charge different people different prices based on various factors (e.g. what they drive, how they're dressed, what ethnicity they are, their age, etc.).
This particular bodega, where I wanted to buy my tuna fish sandwich on a roll, practiced price discrimination regularly. If I was dressed in a suit driving my Mercedes, they may charge me anywhere from $5 to $6 for a simple tuna sandwich. (Manhattan is super expensive.)
If I was dressed like a bum, they would charge me maybe $3 or $4. Maybe they would charge me less if I had facial hair and Timberland boots on. You get the point...
Anyway, before I had my assistant go buy the the tuna sandwich, I hatched a plan.
I said to him, "Derek, instead of buying the entire tuna fish sandwich, buy the roll and a small can of tuna separately, and bring it back to me. I will make the sandwich myself since we have the Mayo, lettuce, and tomato in the refrigerator."
The roll alone sold for about $.75, and the small can of tuna sold for about $1.50. I figured this way, I would spend $2.25 for the sandwich instead of possibly $6. I could save up to $3.75!!!
Derek came back and said, "They knew what I was going to do, so they charged me the same price as if I purchased the entire sandwich (e.g. $5)."
I asked him if he paid for it, and he said that he did. I told him that he was fired (just kidding). I didn’t fire him, but I couldn’t believe that he would pay the same price for a sandwich that wasn't put together as for one that was.
Further, I couldn’t believe that those creeps in the Bodega knew what Derek was up to.
We just couldn’t win!
It was - and is - a war between demand and supply at all levels!
Back to business…
Folks, the PPI (Producer Price Index) number came out the other day, and it was up 1.1% for March!!! Wall Street expected it to be up about .4%. Core PPI (PPI excluding food and fuel) was up .2%, about what was expected.
With respect to the CPI (Consumer Price Index), the number came out yesterday and it was up .3% for March! Core CPI (CPI excluding food and fuel) was up .2%.
There are, of course, other statistics that measure inflation, but the bottom line is that food and energy prices are going a lot higher!
This will continue to be the case as more people around the world demand more and more food and energy, and the supply stays relatively static.
Because of the mortgage meltdown and subsequent credit crisis, the Fed has cut interest rates significantly (the Fed Funds rate currently stands at 2.25%). They meet next on the 29th of this month.
Moreover, on the fiscal side, rebate checks have been going out to the public. This is all meant to drive consumer spending, which, in theory, should help stimulate the economy.
The bottom line is that the government is pouring cash into the system. That, coupled with the increase global demand, will continue to send prices higher.
$2.59 today gets you what a $1 got you in 1980!!! You can access this calculator below as well as the inflation numbers at www.bls.gov.
Now let’s take a look at what has happened to prices for consumers ( e.g. the CPI) since 1980.
Let’s look at the PPI since 1980.
Lessons that need to be learned from all of this:
1. Inflation is going to get worse.
2. This means that goods and services will become relatively more expensive for us all.
3. You can’t just keep your money in a bank; you will lose money over the long term.
4. You need to receive a higher rate of return than inflation.
5. This means you HAVE TO invest your money.
6. You must have a very fair portion of your money invested overseas, particularly Asia, which will be your hedge against this inflation since they are helping to create it.
More lessons:
Because of the government's utter failure on the regulatory front, they will just continue to print more currency, which will continue to devalue our money.
This regulation that I am referring to is not only with respect to the government's regulation of others, it is also their utter failure in regulating themselves (e.g. spending and borrowing too much).
DO NOT count on them - count on yourselves! Those greenbacks in your pocket may not be worth as much as you think they are. Although the inflation statistics, some of which I have cited clearly, show you inflation, I know that they are NOT capturing how much inflation is really out there.
The algorithms and parameters for measuring inflation NEED to be changed so that we can realize how bad the problem really is.
Until the next time...
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Jason Jovine
Contributing Editor
The Tycoon Report
