Ride the Inflation Train

By Bryan Perry

As developed-world consumers, we have entered a very difficult period in our lives. Many of the previously emerging markets are achieving grownup status and are becoming first-world economy participants. The wave of people entering the middle class has created exponential demand for a better way of life and the "things" that go along with it. And that has put strong upside pressure on the price of just about every good and service we've been using.

When China entered the World Trade Organization in 2001, it was the sea change that kick-started the whole commodity boom that, until just recently, showed a steady and relentless uptrend in food and energy prices -- two of the most-important components of any household budget.

The latest data on inflation showed a disturbing trend that the Fed prefers to talk down because of slowing consumer demand. But the data was very revealing about how real the threat of inflation is:

• Producer Prices rose 1.1% in July, while core PPI, which excludes food and energy, jumped 0.7%. The market had expected increases of 0.6% and 0.2%, respectively.

• Total PPI is up 9.8% year-over-year, the highest level since 1981.

• The core number is up 3.5% year-over-year, which excludes food and energy.

• The outlook for commodity prices remains highly uncertain and is the key factor in the inflation outlook at this time.

Producers have done a masterful job of avoiding passing on many of the raw material price increases, but those margins of safety are rapidly narrowing and increases for the price of finished products must eventually be priced into the final demand equation if businesses are to show profits.

Just look at how the airline industry has remade itself in the past six months by slashing routes and making passengers pay for everything from luggage to water. These desperate actions are completely in-line with their need to survive at any cost.