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Slice and dice baby, because there is no inflation (part 1)

Written by A Forex View From Afar on Tuesday, January 15, 2008

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Actually there is inflation, and a lot of it too. I won't go to the point of questioning how inflation number are calculated, or how are they taken in account, I'll only show actual data.

The release for Producer Price Index (also known as PPI) came out -0.1%, beating market expectations of 0.2%.
One could easy say with -0.1% Producer Price Index, there is no inflation, go ahead and cut the rates. But actually the PPI came so low because this is the month over month number, and last month we had an all time record of 3.2% prices increase.

Over year to year basis, inflation experience by factories is up to 6.8% (seasonally adjusted). Since 1993, only one time inflation had such a big number. This is huge and it's more likely to be submitted to the CPI.

Since these days the hottest topic around is oil prices, we'll focus a little on them, but before a little story.

We have a factory producing bread. We mix all the ingredients and we put them in the baking oven. Because energy got sky high in 2007, baking will cost us more. After the bread is ready, we need to transport it to retailers. So, we load it in a truck and ship it. Again, because energy (fuel) cost more, we will have to pay more for the shipment. Note that we didn't include here the price for wheat (for flour) that doubled during 2007.
In the end we'll have somehow to increase our incomes, because expenses take us out of business and the easiest way to increase our incomes is to increase prices.
According to Reuters-crb energy index we had a 55% increase in prices in 2007.

Returning to oil prices and PPI, do you actually have any idea what inflation are we experiencing in raw materials on a YoY basis? 20.6% and it's up from -4.7%.

Incredible high! But there is more to come. Energy crude materials on YoY rate is 17% up from -15.7%.
Some of this inflation has already been passed to intermediate goods, which are up too, and as said before, it's very likely these prices will be passing to consumers.

So, go ahead and cut and slice interest rates, because there is no inflation.
Part 2 will follow after tomorrow's CPI.

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