Gold retreated $15 yesterday. Oil bounced back to $125. And in April, food prices rose 0.9% – the most since 1990.
Yesterday, we mentioned that clothing prices were on the rise. Today, the Wall Street Journal says shoes are taking a hike upwards.
Here in London, inflation is at its highest level in six years. In China, 8% consumer price inflation is spooking the financial authorities. And import prices in the United States jumped 1.8% in April.
Why would imports be going up so fast?
Ah… glad you asked. Because that is what is really not “normal” about the latest tremors. For 20 years, inflation has been held in check by the group of happy events we described above. But what will hold it back for the next 20 years?
China used to export deflation, as the economists put it. Now, with prices rising in the Middle Kingdom, it has no choice – it must export inflation. With inventories at 30-year lows – there are no price cuts coming from there either. Wages are rising. Raw material prices are soaring. Food is out of control.
But wait, there’s more…
Remember the great credit expansion of the last quarter century? For 25 years, the cost of money got cheaper and cheaper and cheaper… to the point where the Fed was lending money at negative real rates (and still is!) In 1982, the yield on a 10-year Treasury note was nearly 16%. Today, it is under 4%.
But now, money is becoming more expensive. If the credit cycle has turned, as we think it has, lending rates will go up with inflation. And the cost of money… along with the cost of other essential components… will drive up prices for nearly everything.
What will the U.S. consumer do? He has little prospect of higher wages – not with so many billions of people willing to work for less. His main asset is falling in price. Credit is getting tighter. And his cost of living is going up – maybe sharply up.
This time he won’t be able to borrow his way out. This time, more credit… lower rates… and more inflation won’t help him. This time, inflation will hurt him.
Markets and Money