Ben Bernanke is a liar. In defense of his decision to pump money into the system through quantitative easing (QE2) he used the argument that inflation was necessary to protect and spur the economy. However, the Federal Reserve, like the federal government, doesn’t see food and fuel as important factors in regards to the inflation model, contrary to what truly affects Americans.
Inflation though is VERY real, and has been rearing its ugly head since 2009, and especially here in 2010. While gasoline and heating fuel prices have stayed relatively low since the beginning of the recession due to less use by industry, food prices on the other hand have been rising as much as 60%. One example of this has been the cost of butter, which in one area of the country went for $2.50 per pound in 2009, but now is going for $3.69 per pound; a jump in price of 48%.
Two weeks ago, the Finance Examiner wrote an article on the projected energy consumption by Americans this coming winter, and the rise in costs for natural gas and heating oil. In this article we showed how there is an expectation of a 6% rise in the costs of natural gas but this was before the Fed’s decision for QE2 on November 3rd. That 6% looks very much to climb to 20% or higher, causing an extreme hardship to the bottom 20-40% of Americans.
In an article yesterday by Tyler Durden of Zerohedge, JP Morgan came out data and a chart on how much each segment of the population spends for basic necessities such as food and fuel. The bottom 20% spend over 55% of their income on these two things alone. (See chart on the left in slideshow)
As is now becoming very evident, the prices of energy and food products are about to surge, and in many cases have already done so, but courtesy of some clever gimmicks (Wal Mart selling what was formerly 39 oz of coffee as a 33.9 oz product for example) the end consumers haven’t quite felt it yet. They will soon.
There is a limit to how much every commodity can open limit up before it appears on the SKU price at one’s local grocer. And while a marginally declining “core CPI” is irrelevant for this exercise as it measures only items that are completely outside of the scope of everyday life, what will be far more important to end consumers will be the push higher in food and energy costs.
The problem, however, is that for the lowest 20% of Americans, as per the BLS, food and energy purchases represent over 50% of their after-tax income (a number which drops to 10% for the wealthiest twenty percentile). In other words should rampant liquidity end up pushing food and energy prices to double (something that is a distinct possibility currently), Ben Bernanke may have very well sentenced about 60 million Americans to a hungry and very cold winter, let alone having any resources to buy trinkets with the imaginary wealth effect which for over 80% of the US population will never come.
Inflation is known as the ‘hidden tax’, because it affects the basic necessities for everyone, and provides little justification for higher wages to supplement it since the government has negligently cast both food and fuel out of the equation to save money on COLA increases.
That the government and Federal Reserve are liars is inconsequential when a large majority of Americans will soon discover how difficult it will be to survive this winter with necessary food for their bodies, and heat for the their homes.