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A number of our subscribers have rightfully pointed out the apparent contradiction in our call for slowing economic growth in the United States combined with a pick-up in inflation.   Not unlike politics, inflation is local.  In many local markets, we continue to see a pick-up in inflation, despite the increased likelihood of sequentially declining growth in the United States.

China is probably the best example of accelerating inflation globally.  Directly below we’ve posted the chart of Chinese CPI going back two years.  While we are not back to the year-over-year increases in CPI that we witnessed in late 2008, which neared 5%, CPI in China is accelerating.   From July 2009 of last year to the most recent data point for August, CPI growth year-over-year has increased steadily to 3.5%, which is a 22-month high.

Where Is the Inflation? Just Like Politics, It’s Local - 1

Another global inflationary signal relates to major food inputs.  Immediately below we’ve posted the CRB Foodstuff Index.  This index incorporates the following food inputs: butter, cocoa, corn, hogs, lard, soybean, steers, sugar, and wheat.  This index has accelerated dramatically off of its June lows and is up almost 35% on a year-over-year basis.  If a year-over-year price increase of the 35% doesn’t imply some form of inflation, then shame on us. 

Where Is the Inflation? Just Like Politics, It’s Local - 2

Our Retail team lead by Brian McGough and Retail COO Zach “The Hammer” Brown also highlighted another key inflation data point recently in a post on cotton titled, “Apparel: We Just Got More Bearish.”  As Zach wrote in the note:

“While we’re talking 3-Standard Deviation moves, look at the recent move in cotton. Yes, the recent spike puts it into the ‘statistical aberration’ bucket. Anomalies or not, it is an economic reality, and a 50% boost in the industry’s biggest cost input must be dealt with.”

Cotton is, obviously, one of the key inputs in making apparel; ultimately, inflation in cotton prices will be felt throughout the apparel supply chain. Either consumers will have to pay higher prices or retailers, apparel makers, and/or vendors will have to eat margin. In the U.S., this could not come at a worse time, as Consumer Confidence recently hit a 13-month low and unemployment continues to hover above 9%.

Where Is the Inflation? Just Like Politics, It’s Local - 3 

Currently, the primary driver of inflation is the continued debasement of the U.S. dollar.  As the U.S. dollar declines, the cost of goods and materials priced in U.S. dollars should increase. In our opinion, the main reason we are seeing all-time highs in gold is that investors and sovereign wealth funds globally are looking to protect their wealth from the debasement of fiat currencies. 

Even if we aren’t currently seeing inflation on a reported basis in the U.S., the rapid increase over the past few months in food costs, apparel costs, and reported CPI from China suggest anything but deflation to the team at Hedgeye.

Daryl G. Jones

Managing Director