The Coming Inflation And Food Prices

Speaking of beating Ben Bernanke like a rented mule, that's about as much as I beat the inflation warnings.  Fortunately, I'm not alone.  The fine folks at the National Inflation Association are on the problem and have put up some very good study work.  Someone made sweet love to their calculator (or Excel or something) for some time to put up these numbers. 

The NIA posted a report a few days ago on the likely effects of the Fed's QE2 on (mostly) food prices.  The web page that includes the articles they print is here and while I'm a member of the NIA, I don't think you need to be a member to download it and read. 

Their numbers are simply shocking, like cold water in your face.  Their methodology seems solid to me, which is to try and establish how prices varied with inflation at other times in history (mostly the 1970s) and apply those same price ratios of uninflated to inflated prices in order to predict the coming prices or goods.  Let me quote a few things that are a bit mind boggling to me.

The median U.S. home is currently worth $171,700 or 6,550 ounces of silver. After the inflationary crisis of the 1970s, the median U.S. home declined to below 1,000 ounces of silver. NIA believes that because this decade’s Real Estate bubble was so large, Real Estate prices will likely overcorrect to the downside and the median U.S. home will be worth only 500 ounces of silver at some point this decade. Therefore, if you buy just $13,000 worth of physical silver today, NIA believes you will be able to pay cash (without any mortgage) for an average American home within the next 5 to 10 years.

NIA expects ... the average price of an ear of corn (currently $1.25) in your grocery store will likely rise to around $11.43.

NIA expects ... the average price for a 24 oz loaf of the cheapest store brand of wheat bread (currently $1.69) in your grocery store will likely rise to around $23.05.

 NIA expects ... the average price for a 11.30 oz container of Folgers Ground Classic Roast Coffee (currently $3.99) in your grocery store will likely rise to around $77.71.

NIA expects ... the average price for a plain white men’s cotton t-shirt at Wal-Mart (currently $5) will likely rise to around $55.57.

The average American family currently spends only 13% of their total annual expenditures on food and they spend 34% of their total annual expenditures on housing. NIA projects that by the year 2015, Americans will be spending as much as 40% of their annual expenditures on food, and as little as 10% of their annual expenditures on housing.  NIA expects the government to implement legislation that will prevent landlords from increasing rents in a way that even remotely keeps up with price inflation. We pray that the U.S. government doesn’t implement similar price controls in the food sector, as it will only lead to empty store shelves like what was seen during recent years in Zimbabwe.

I see two basic problems with their methodology. First, in basing the maximum prices on the 1970s equivalent, they are excluding the possibility that some commodities cost more due to genuine shortage, or policy-driven shortage (for example, buying corn to make ethanol for fuel and keeping it out of the food market) or simply due to changes in efficiencies of producing it.  One commodity may not go up as much as they predict, but something else may go higher.  Second, it's possible that some items will not go up in price as much as predicted, they'll simply disappear.  If no one is willing to buy a Hershey's bar for $15.50, they may disappear from store shelves, or Hershey's may try to sell smaller chocolate portions for $5.