The Worrisome Numbers That the Official Inflation Figures Aren't Showing

The official consumer price index registers low inflation last year. But some underlying price growth in energy, raw goods and medical care could mean significant inflation in 2011.On the surface, the outlook for inflation this year appears tame. The consumer price index (CPI) registered a modest 1.5% in 2010, and the so-called "core" inflation gauge, which excludes food and energy, grew a mere 0.8%.

But looks might be deceiving. Beneath the low CPI reading, the producer price index has been rising at a rate of 4%, and the costs of intermediate goods in the middle of the supply chain climbed by 6.5% in December alone.

That wasn't an anomaly: The cost of intermediate goods floated more than 5% higher, year over year, in 11 out of 12 months, and it exceeded 6% growth in eight months, hitting a high of 8.7% growth in April 2010.

Fed Chairman Ben Bernanke may well be correct about companies being unable to pass on higher producer costs, but he didn't address the skyrocketing costs of raw materials -- what the Bureau of Labor Statistics calls "crude goods." As this chart from the bureau indicates, the cost of these crude goods has grown by 15% or more throughout 2010, far above the 4% producer price index increase or the minimal CPI advance.



The implication from these numbers is ominous. If companies selling finished goods can't raise retail prices, but the cost of raw materials and intermediate goods in the supply chain are rising by 15% and 6.5%, respectively, that means manufacturers' profit margins will become increasingly squeezed. It's basic math: If your costs rise but the price you charge customers remains unchanged, your profit margins shrink.

And that's bad news for the stock market. The current market rally is based, not just on an improving economy but more specifically on rising corporate profits. Growing producer costs and raw-materials costs could crimp those profits, spelling trouble for the stock rally.

In other words, the rising costs of basic and intermediate goods doesn't just threaten to burden consumers with higher prices, it also threatens to cut into the fat profit margins that have been driving the stock rally for almost two years.

Energy and Medical Costs Also on the Rise

As if rising commodity and supply chain costs weren't worrisome enough, energy costs also are skyrocketing. Gasoline prices rose 8.5% in December alone, and overall energy costs grew a sobering 13.9%. Energy is consumed at every step of the global supply chain, so higher energy costs end up adding raising the costs for everything: grain, transport, manufacturing, chemicals, you name it. While bad weather is certainly the primary mover of grain prices, higher energy costs certainly aren't helping food commodity prices, which hit 2.5-year highs, triggering global protests.

And while the Bureau of Labor Statistics claims that medical care costs rose a modest 3.4% in 2010, that statistic should raise some eyebrows -- real-world cost increases for those paying the bills rose significantly more. In California, health care insurers have raised prices by up to 59%. Insurers also sought increases of 11% in Iowa and 21% in Vermont. 0

Insurance provider WellPoint's price increase of about 10% "reflects the fact that health care costs continue to escalate faster than the growth of premiums," according to a company spokesperson. Wellpoint reported a $130 million loss in its California operations last year.

What Is Consumers' Real Inflation?


Consumers may be seeing their costs rise in other areas too. Aside from energy and medical care costs that are rising far faster than the official CPI suggests, another "big ticket" item for homeowners is property tax. As I reported here in December, those taxes are rising even as property values sag in most part of the country.

In some places, other taxes also are growing. Illinois lawmakers made headlines by raising the state's income tax by 66% -- a move that will certainly inflate residents' taxes more than 1.5% in 2011.

The possibility that the official CPI doesn't accurately reflect the reality of household expenses is more than just conjecture. Analyst John Williams, who publishes the price-tracking Shadow Government Statistics website, calculates that prices have flown north of 4%.

Add up the data, and it looks like companies selling to consumers face an unsavory choice in 2011: either absorb hefty price hikes in energy, raw materials and intermediate goods and see their profit margins shrink, or try to pass on the higher costs to consumers and hope sales don't drop too drastically.

Even if prices for those goods don't rise, consumers may find little to cheer about if gasoline, food, medical care and local taxes keep growing at double-digit rates.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum

562 Comments

Filter by:
carleronn

The PPI was the leading indicator of inflation in the '70s good article

January 17 2011 at 5:59 PM Report abuse +1 rate up rate down Reply
dande98214

just another hokie piece of garbage you click on the reference site about health care and it is not their any more

January 17 2011 at 5:55 PM Report abuse rate up rate down Reply
jkennedy806

Of course the officials don't want to realease negative numbers, remember we are coming off the summer of recovery. My neighbor found an interesting article about One West Bank, George Soros and Goldman Sachs and why home loan mods aren't working. AOL had buried it. Apparently, the connection is blatent!! and obvious! Her elderly parents went for a reverse mortgage and found themselves in foreclosure instead, and now they old people were kicked to the curb by the bank.
My neighbor and brother are just stumped. Their parents are living with the children, however, be very careful now, 47% of all banks profits last year were done on foreclosures, yeah they are sitting on the market and not moving cause of clouded title. But the banksters go to the FDIC and get cashed out. Compliments of Pres BO. I always wondered what the connection between him and Soross was.

January 17 2011 at 11:32 AM Report abuse +1 rate up rate down Reply
bohemianacres

Of course the price of intermediate materials are going up faster than the end product. This is a fact of mathematics. Take for instance Corn Flakes. The amount of corn to make a box of flakes costs 15 cents, the charges of the farmer. Comparing from the previous year when the farmer charged one dime, this increase in price in one year and 50 percent. But the grocery store box of corn flakes in that same year goes from $2.00 to $2.10. The same dime. But for the grocery store the increase represents only 5 percent, not the 50 percent represented in the farmer's take. So which is it for the average corn flakes' eater like me? A 50 percent hike or a 5 percent hike. It is all relative. The only thing I see is prices are going up and sooner or later my budget will not be able to afford corn flakes. That is the reality of inflation, and the reality of the economy based on the amount of purchased items by the public.

January 17 2011 at 11:18 AM Report abuse rate up rate down Reply
1 reply to bohemianacres's comment
bggdg

First, the PPI includes three separate componets. Crude materials, intermediate materials, and finished goods. In your example, corn is a crude good, not an interemediate good. Second, since we are talking about the PRODUCER price index, the cost of corn flakes at the grocery store is not included in the figures at any level. Rather, this would be part of the CONSUMER price index. Last, and probably most important, it is anything but "a fact of mathematics" that "intermediate materials are going up faster than the end product". While it's certainly POSSIBLE for this to occur, it's also possible, for example, for end products to increase in price even while crude or intermediate pices are declining. The inflation can and often does occur in various points of the supply chain.

January 17 2011 at 12:43 PM Report abuse rate up rate down Reply
cferrin104

Funny thing about trying to blame Obama for commodity inflation is idiotic, he has nothing to do with commodity prices increasing

January 17 2011 at 10:25 AM Report abuse +1 rate up rate down Reply
1 reply to cferrin104's comment
cferrin104

Facts are facts. The current rise in commodity prices has to do with the terrible weather we are having and nothing else. Record droughts in Russia, floods in Pakistan all caused terrinle loss of crops.

January 17 2011 at 10:58 AM Report abuse rate up rate down Reply
gritzsl

Where the lines blur. Values change when you enter Manhattan. Both Wall Street and Madison Avenue. One location, Wall Street is all about money the other, Madison Avenue is all about selling something main street even if they don't want it. The lines get blurred between right and wrong, the truth and less than truth, fact and friction, or down to the basics GOOD and BAD. Meaning what is good for Wall Street or Madison Avenue may less than good or even bad for main street America. Wall Street put $90,000,000,000 in bonuses into their pockets while most of main street suffered. Madison Avenue (Advertising Capital of the world) sold Main Street on products that either only work marginally or in worst case don't work at all. But in the process they pocketed Billion of $$$. See any trend here. What may be good for the Rich and Powerful in NYC in many cases is not good for the country. Even the world biggest Sports gambler said her was taken for a ride by Wall Street. Never again. The moral of this story. Don't invest in Wall Street. Ites basically a big Scam. In many cases Wall Street is found guilt by the courts for scamming the public but the rewards and far greater than the risks and fines leveled against the scammer.

January 17 2011 at 10:11 AM Report abuse rate up rate down Reply
chase5300

BIG THANK YOU!~ To Mr. Smith, for giving us REAL information, and not the propaganda coming from Mainstream media aka the government cronies. Folks: wake up and demand a stop of our insance fiscal policies before we destroy the USA from our own stupidity.

January 17 2011 at 9:48 AM Report abuse rate up rate down Reply
1 reply to chase5300's comment
GAYLEN

What has kept our inflation down over the years, just one thing, its big and its getting uglier every year! China,our Government over the years have traded our industrial manufacturing to China to keep our inflation rate down. This has kept the American public happy with cheap produxts, but now we do'nt have any the manufacturing base any more to build our economy. Thank you Washington and Wall Street, let the big time bonuses roll!

January 17 2011 at 9:19 AM Report abuse +3 rate up rate down Reply
2 replies to GAYLEN's comment
warrenbent

Let's not forget that manufacturing OUTPUT has been growing consistently (with a few infrequent hiccups along the way) for over a century, and is now at an all time high. It's almost certain to be higher yet a year from now, and still higher a year after that.

January 17 2011 at 9:57 AM Report abuse rate up rate down Reply
vlwads

tjdwill2dot3

I tend to agree, however; the unemployment rate amoung college graduates seems much higher than 4.5%. From personal expierence I have three adult children with graduate degrees from great schools, Pepperdine, U of W, Princeton and all are bright concientious and are looking for work.

January 17 2011 at 11:14 AM Report abuse rate up rate down Reply
1040advocate

Wanna save money? Get a horse. No insurance, no maintenance, no gas, no registration, no taxes.

January 17 2011 at 8:55 AM Report abuse +1 rate up rate down Reply
cwwaite1943

How could anyone with an IQ higher than plant life not believe that inflation is a sure thing when our politicians and the Fed think they can continue to do the same wrong things and expect different results? When you print money wildly there is only one outcome--INFLATION. Why does no one mention the Weimar Republic?

January 17 2011 at 8:48 AM Report abuse +3 rate up rate down Reply