August 2011
There is a great song that starts, “at last”. Can’t remember the rest, just those two words and the tune. And that is how many of the baby boomers are feeling: I worked hard, raised good kids, saved, a nice house, a life, a wife.…..at last.
Let’s talk about inflation.
There are two types commonly spoken about and published: headline inflation and core inflation. Headline inflation includes goods and services that represent the total inflation in the economy. For example it includes the price of an Ipad, the cost vs quality of which has been falling over time, thus representing a fall in inflation for this product. It also includes food and energy costs, such as bananas and electricity.
Then there is core inflation, which is what governments and market commentators prefer to use. That is because it is less “volatile” they say, it theoretically provides a better measure because it excludes “volatile” components of inflation in the economy such as “food and energy”. Thus for forecasters and the elites that manage the economy [and any payment linked to CPI such as a pension] they say it is more “relevant”.
Now if you are sitting at home and wondering which is the more relevant measure of inflation for you; what would you choose? Headline inflation of course, after all, as one very wise person in Queens [USA] suggested, “I can’t eat an Ipad”. What concerns us is the day to day living, of which it is indisputable food and energy are critical cost factors.
And any person who shops drives or gets cold will tell you here in Australia, energy and food prices have soared. That is why they have gone on a consumption strike that is hurting the retail sector.
And it hasn’t really started yet. The FAO reports that its global food price index has reached an all time high – a 39% price inflation year on year. Its cereals index has inflated 71% year on year. The list goes on and it is important reading.
And it does not take much research to know that energy cost is going to increase dramatically over the coming decades. It has been underpriced for decades and some catch-up is inevitable. Indeed, for energy and food, many credible pundits are saying we have already passed the tipping point of continuous consumption growth in a finite world and it is all downhill from here [if you have to pay for it, that is, not if you produce it].
What will make it harder for the baby boomers, is that just when their income becomes reliant on assets and income from those assets, rather than employment income, we are experiencing a period of stagflation – cost inflation whilst income and asset prices deflate. And many won’t have allowed for it when calculating their savings for retirement because they have never experienced this high inflation for such a sustained period.
This stagflation is likely to remain for a decade or more as internationally, over indebted people, companies and countries de-leverage and / or go broke.
The consequences of which is that as medical, food and energy costs soar, we have less and less in savings to meet those future expenses. And generally speaking, people always underestimate their future requirements in any event.
I was fortunate to catch a renowned geographer, Professor James Kirkpatrick AO on the local radio, and he was explaining where we are headed within the next two decades as a consequence of this massive food price inflation. He suggested that there will be reversal of the multi decades of people swarming to cities from the country to have a career, as people will rush to the country to obtain food. All the secular indicators suggest this is true. Taking that literally, people will abandon consumerism and move closer to self reliant sources of food, shelter and warmth.
Taking that argument further, it won’t just be people from Sydney say, it will be people from all over the world, leaving countries that have insufficient food, in their masses, on ships not boats, and moving to those that have food surpluses.
The expectation there is massive inflation ahead is also confirmed with the price of gold. It has again reached an all time high.
Disclaimer: This is not advice. I am not licensed to give advice of any kind. Advice can be understood as individual advice to a person about their particular financial circumstances, or general advice about investing. So you cannot, and should not, rely on anything written here. You should only rely on advice from a licensed advisor. If this article has sparked interest please seek out a licensed advisor.