“Serious” Inflation Is Coming

Thank you Ben Bernanke for all the money printing.  Thanks to a massive injection of cash into the financial system by the Federal Reserve and other central banks, the price of almost every major commodity has skyrocketed over the past six months.  Now those price increases are starting to filter down to the retail level.  During a recent meeting with USA TODAY’s editorial board, Wal-Mart CEO Bill Simon said that rising inflation in the United States is “going to be serious” and that Wal-Mart is “seeing cost increases starting to come through at a pretty rapid rate.”  For many years Wal-Mart has been famous for their “low prices”, so for the head of Wal-Mart to publicly warn that much higher prices are coming is more than a little alarming.  There are millions of American families that are already drowning in debt, that can barely pay their mortgages and that are struggling to put food on the table for their families.  So what is going to happen to the U.S. economy when prices start rising substantially at places such as Wal-Mart?

But Wal-Mart is not the only major corporation that says that inflation is coming.  Hershey has just announced price increases of about 10 percent on their entire line of products.

So if you like chocolate you better start stocking up now.

Cocoa production is being seriously threatened by the political unrest in Africa right now.  The recent chaos in the Ivory Coast is certainly not good news for Hershey, but the truth is that all of the long-term trends indicate that prices for commodities such as cocoa, coffee and sugar are going to move up anyway.

In fact, Aaron Smith, the managing director of Superfund Financial, believes that coffee, sugar and cocoa will all be five to ten times more expensive by 2014 than they are today.

So if you are addicted to coffee or to sugar you might want to start making your plans accordingly.

But the truth is that inflation is not limited to just a few commodities.  Virtually every major agricultural commodity has soared in price over the past 6 months to a year.

So what is causing all of this?

Well, there are several factors which are major contributors.

First of all, overall global demand continues to increase.  The population of the world continues to grow, and as the economies of nations such as China and India develop, millions more people want to enjoy luxury items such as chocolate and coffee just like Americans do.

Secondly, all over the world central banks have been recklessly printing money in an attempt to stimulate their economies, but this is also going to end up causing tremendous inflation.

So how does that work?

Well, it is actually very simple.

For example, in the United States when there are more dollars chasing the same number of goods and services, what is going to happen?

Prices are going to rise of course.

And we are seeing this happen all over the world right now.

Thirdly, as the price of oil continues to rise, it is going to increase the cost of everything else.  The era of massive amounts of cheap food being transported around the world using massive quantities of cheap oil is rapidly coming to an end.

The following chart if from the Federal Reserve.  It shows that the price of oil is rapidly moving back to the level it was at prior to the financial crisis of 2008.  In fact, this chart is slightly out of date.  At last check, the price of oil was over $107 a barrel.  So what is it going to mean for our economy if we soon surpass the record that was set back in 2008?….

Fourthly, global instability is also going to cause prices to continue to rise.  Over the past year we have had really bizarre weather all over the globe, we have seen revolutions erupt all over Africa and the Middle East and the third largest economy in the world (Japan) just experienced the worst disaster that they have been through since World War 2 ended.

When things are unstable, economies don’t work as efficiently.  That means that less goods and services are produced.

But when there are less goods and services being chased by an increasing amount of money that tends to push prices up.

The truth is that inflation is here, and if the CEO of Wal-Mart is right, it is not going to go away any time soon.

In fact, many believe that the world is on the verge of another major economic crisis.

If you stop and think about it, every major region of the world is dealing with very serious problems right now.

Right now, the European debt crisis is worse than it ever has been before.  Did you notice that Standard & Poor’s just downgraded Portugal’s debt for the second time in a week?  Now Portuguese debt is rated BBB-, which is only one level above junk status.

That is a very alarming sign.

Asia is dealing with the Japanese crisis, nearly all of the countries in the Middle East are dealing with protests or full-blown revolutions, Africa is dealing with the war in Libya and quite a few revolutions of their own, and the U.S. is still deeply struggling with a whole host of economic problems.

Most Americans don’t realize just how precarious things are at the moment for the global economy.  The financial crash of 2008 did a lot of lasting damage, and the next wave of the financial crisis could potentially be even worse.  Unfortunately, the global financial system is more vulnerable than ever right now.

So what are the Federal Reserve and other central banks going to do the next time a major financial crisis happens?

They are going to print even larger quantities of money and they are going to give even larger bailouts to their friends of course.

The dollars that you have today are never going to be more valuable than they are right now.  Don’t wait too long to use them.  If you have a huge pile of dollars sitting in the bank your wealth is slowly but surely rotting away.

Very hard economic times are coming.  The inflation that the CEO of Wal-Mart is warning about is only the beginning.  Eventually we are going to see inflation in this country that is going to be absolutely mind blowing.

But don’t wait until the storm hits to start preparing.  We all have time now to prepare, so let us be wise and make the most of it.