Agflation !

Thursday, June 21, 2007 | 06:49 AM

Over the years, we've looked at -- and coined one or two -- terms for the current inflationary environment. We have reviewed such phrases as:

Stagflation: The classic 1970s term for high inflation (+6%), very anemic growth (0-2%)

Blahflation: Street Insight's Doug Kass term circa 2006 (video)

Stagflation Lite: was what NYU's Nouriel Roubini called it in June 2006;

Demi-Stagflation: My own term for elevated inflation and soft growth (May 2005)

Inflastagdeflation: Minyan Keven Depew's term for understated Inflation, stagnant wages and incomes, and price cuts in markets that are either highly competitive or experiencing weak demand.

To this list of clever wordsmithing, we add one more phrase, courtesy of Raymond James Chief Strategist, Jeff Saut.

That word is Agflation:

"These inflationary leanings were reflected in last week’s headline CPI figures (+0.7% in May), which were the second highest in 16 years, that is still not being reflected in the laughable “core figures” (+0.1%), begging the question, “Can this particular ‘conundrum’ continue?!” 

Again, commonsense says NO, since the 25% increase in the Goldman Sachs Commodity Index over the past five months suggests that eventually commodity prices will bleed into the core readings.

This “agflation” has left grain prices at 10-year highs, stoking inflation fears in Europe and putting central bankers there on alert. Also adding to the agflation-agitations has been worldwide drought conditions, a fact that has not been lost on China, where foodstuff consumption accounts for a large portion of disposable income. Consequently, China has raised interest rates substantially over the last 12 months. Even Japan may have to join the international rate-rape since Japan’s 1Q07 GDP was revised recently to +3.3%, from 2.6%, implying that growth there is stronger than both here and Europe. If Japan raises rates, it would have wide ranging implications for the ubiquitous “carry trade” that drove usage of currency and stock derivatives up 24% in the first quarter of this year to an astounding $533 trillion, but that is a discussion for another time.
" (emphasis added)

As we noted this past weekend, the prices for commmodities in general, and agricultural commodities in particular, had reached all sorts of highs: Wheat prices hit 11-year high; Oil Rises to Nine-Month High; Copper Gained; Gold, Silver Rise; Corn, Soybeans Rise; Cotton Extends Rally to Three-Year High; Cost of Gas and Food Rose Sharply Last Month;   

The absurd list of what doesn't go into "core" inflation is long, and ever more ridiculously, getting longer: Wheat, Oil, Copper, Gasoline, Gold, Silver, Corn, Soybeans, and Cotton. 

Oh, and education and medical care never seems to have much impact, regardless of the extraordinary price gains they have seen over the previous decade -- the past 5 years in particular.

Then there is the actual cost of Housing, not properly reflected in the BLS Consumer Price Index (CPI).

But other than all these items going up in price, there is no inflation.


UPDATE: June 22, 2007 8:17am

Steve sends in this April 27, 2007 report from Merrill Lynch's Richard Bernstein and Jose Rasco, titled "Global Agriculture & Agflation"

Food prices are rising, putting upward pressure on producer and consumer inflation.  Agflation has begun.  Given the expanding constraints on food supply, the changing demand for food, and the entrance of the energy business as mass consumers of food products it is not surprising to see food prices rapidly putting upward pressure on overall inflation.

This can be good news for the food companies who are attempting to pass along those higher food input prices to the consumer.  They are maintaining or expanding margins and they are hopeful that the constraints on food supply and the changing and expanding global demand for food products will continue to put upward pressure on prices.

Unless someone comes up with an earlier use of the phrase Agflation, Imay have to give authorship credit to Bernstein and Rasco. (Sorry, Jeff).


Jeffrey Saut
Investment Strategy
Raymond James, June 18, 2007


Thursday, June 21, 2007 | 06:49 AM | Permalink | Comments (29) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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Isn't there an agricultural commodity index ETF that can be used to play this ag inflationary trend? Anyone know what it's called, or think it's a good idea (or if it's bad timing now..)?

Posted by: Kevin in Boston | Jun 21, 2007 8:13:33 AM

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