Price watch

inflation
Sponsored By:

Keep Your Eye on Inflation in 2013

The nightmare of hyperinflation has been soundly debunked. Since the bear market lows, there has been fear that loose central bank policies and high government debt would push prices sky-high, but inflation has remained very measured and below historical standards.

However, that’s not to say that prices can’t move higher in 2013. And even if 1970s style hyperinflation is avoided, just a modest bump in prices could take a bite out of consumer spending at a time when the economy needs it more than ever.

Consider the following headlines:

So what gives?

Well, there are some specific problems for food and energy. There recently was a significant rise in vegetable prices due largely to a freeze in California and Arizona affecting crops, and gasoline prices continue to be pushed higher thanks to refinery troubles in the West.

But these price are only part of the story. The core CPI rose 0.3% as well — a notch above economists’ consensus estimates of 0.2%. That’s not anything to panic over, but it’s worth watching since this increase has happened as the dollar has gained ground against other currencies.

Inflation and the Dollar

There is an inverse relationship between the dollar and commodity prices, since they are priced in U.S. currency. As the dollar gains in value vs. its peers, the commodities become cheaper because of the purchasing power of the greenback. As the U.S. currency falls, dollar denominated commodities because more expensive.

Oddly, recent price increases have occurred even as the dollar has been firming up to levels not seen since August. The U.S. Dollar Index, which measures the greenback’s moves against six major global currencies, hit 82 yesterday — the highest level in about six months and challenging 2012’s high of around 84.

This isn’t due to any great growth in the U.S. or fiscal responsibility in Washington, of course. It’s because of actions by other governments to devalue their currency (particularly in Japan) to make exports more competitive, and the virtues of the dollar as a “less bad” alternative to the euro amid the mess across the Atlantic.

What would happen if Japan’s central bank lets off the gas and Europe sees some stability? Well, we could see a dip in the dollar — and a subsequent rise in commodity costs.

To be clear, there’s nothing to worry about right now. And given the tepid pace of inflation and the prospect of tighter Fed policy in 2014, we may never see a significant uptick in prices should all go as planned.

However, investors can’t underestimate the bite that even a modest rise in prices could take out of consumer spending. After the hit of an increased payroll tax and shaken consumer confidence as the market continues its slide, Americans don’t need any more reasons to spend less money and further slow down the recovery.

Related Reading:

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

Get The Slant delivered to your inbox every day!

Comments