Inflation Is Going To Be A Major Concern Going Forward

inflationMichael Lombardi: There’s a local bakery near my office I try to get to at least once a week. Sam and his wife own the bakery, and Sam is usually the one there serving espressos and cappuccinos to the many small business owners who meet there early in the morning to talk about business and the economy.

My problem is that I never pay for coffee at Sam’s bakery. “Don’t worry Michael, it’s been taken care of” is the standard line Sam usually gives me. Either Sam is giving me free coffee or one person is buying for everyone in the bakery.

But I think my free coffee streak is about to end.

Kraft Foods Group, Inc. (NASDAQ:KRFT) recently raised the prices of its Maxwell House and Yuban coffee brands by 10%. This is after another company called The J.M. Smucker Company increased its prices. (Source: Bloomberg, June 8, 2014.)

But it’s not just coffee prices that are moving up. Even the government itself is now predicting food prices will rise at an accelerated rate this year.

According to the U.S. Department of Agriculture, inflation in food prices in the U.S. economy will be between 2.5% and 3.5% in 2014. This is compared to just a 0.9% increase in prices in 2013. Inflation of meat prices is expected to be much higher. Beef and veal prices are expected to increase 5.5% and 6.0% respectively this year. (Source: U.S. Department of Agriculture web site, last accessed June 10, 2014.)

I believe food prices will rise much faster than what the government is predicting; I’m talking real inflation of five to eight percent per year going forward. Why is this happening?

As I started writing here years ago when the Federal Reserve came up with the idea of printing money to stimulate the weak economy, money printing leads to inflation. The idea is very simple: the more paper money printed, the lesser its value.

To understand how inflation in the U.S. economy will eventually look, we need to look at a country far away from the U.S.: India. Between the years 2009 and 2013, the M1 money supply (coins, currency, and demand deposits, such as checking accounts) increased by 72% in India and prices in the country increased by 61%. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 10, 2014.)

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