Why are prices rising? The answer is different for each commodity, but in general, it's safe to say that supply is falling short of demand. But investors are throwing fuel on the inflation fire because they expect the Federal Reserve to announce another round of quantitative easing on Nov. 3, which will boost the money supply. In response, traders are buying commodities as an inflation hedge. Among the key items affected:
- Corn. The Journal Star reports that corn prices are up 25% in the last two weeks on strong demand and a lower-than-expected harvest. A year ago, corn sold for $3.50 a bushel: Monday, it was up by more than 54% to between $5.40 and $5.45 a bushel. And a Nov. 9 crop report could further boost those prices.
- Cotton. Bloomberg reports that cotton peaked at $1.198 on ICE Futures U.S. on Oct. 15, "the highest level since trading began 140 years ago." These prices could stay above $1 for the next three years as the ratio of supply to use exceeds 40%. World output at 116.7 million bales will be less than the 117 million forecast in September -- and that will be less than global use of 120.8 million bales, up from 120.5 million projected in September, according to the USDA.
- Wheat. According to Bloomberg, wheat prices are up 44% since the end of June "after drought in Russia and Eastern Europe reduced output." But prices of wheat on the futures markets have recently declined along with those of corn "on speculation that demand for the grain used in livestock feed will shrink as corn prices slump."
- Gasoline. Since corn is the raw material for ethanol, corn's longer-term price rise has also contributed to a spike in gasoline prices. According to the Central Valley Business Times, speculators expect the U.S. to pass regulations requiring a boost from 10% to 15% in the percentage of ethanol in gasoline. Speculators are betting that gasoline prices will rise since ethanol supply will not be sufficient to meet the higher new demand. Meanwhile, speculators are profiting from a weaker dollar by buying oil, which trades in dollars and has risen to more than $80 a barrel.
As USA Today reported, the Social Security Administration announced last week that nation's 58 million retirees and individuals with disabilities will receive no cost of living increase in 2011. Under the law, the SSA can't boost benefits "unless consumer prices in the most recent third quarter have increased since the last cost-of-living adjustment." And there has been no increase in the CPI from the third quarter of 2008.
Why is the CPI flat when the prices that people really pay are spiking? According to Reuters, that could be because the Fed generally excludes what it considers volatile items -- like energy and food -- from what it dubs core CPI. And it could also be that CPI will also see a jump when the October report comes out because many of these prices have risen just in the last couple of weeks.
The irony here is that the Fed's quantitative easing plan to purchase long-term assets such as treasury securities -- dubbed QE2 on Wall Street, which loves to think it's clever -- is being put in place because the Fed thinks that inflationary expectations are too low. It argues that when people think prices will drop, they hoard their money instead of spending it.
But the spike in prices of corn, cotton, wheat, and gasoline is likely to spread inflation through most of the economy like wildfire. When people realize how much these prices are going up, they may resort to panic buying to stockpile these commodities before they rise further. And if the Fed throws more money into the economy, that will only make the problem worse.
What's a senior to do? Either take more risks by investing in the stock market or cut back on consumption. Neither strikes me as a wonderful way to spend one's not-so-golden golden years.