Tuesday November 27, 2007

Bread and inflation

This article belongs to the Singapore inflation watch story arc.

Let's start by saying :

"Bread is an inflation indicator."

In case by any chance you don't get it, I will let BBC explain it to you :

"You can expect to find bread in almost every home in the country, which makes it a key product, " says a spokesman for The Grocer magazine. "People relate to it and everyone has a notion of what a loaf of bread costs, which is why the price is so keenly watched."

"People have traditionally used bread to gauge the cost of living," says economist Edward Dale. "If the rising costs of making a loaf are starting to show up in prices on the High Street, it causes concerns about other products. The public view bread as a general gauge for inflation." Although it is not a key economic indicator, the cost of bread is still watched by the financial markets because of its key ingredient - wheat. "Grains impact on the price of most foods," says Mr Dale. "The current rise in wheat prices is also expected to increase the price of substitutes, such as barley and corn. This would affect the price of beer and breakfast cereals.

- That was from a 9 Jan 2007 article on the BBC website. Over here in Singapore, let's see what is happening. Here is a photo of bread price tags I have been collecting. These tags indicate the price of a standard loaf of 400-gram Gardenia high-fibre white bread in blue packaging that one would expect to pay at any supermarket, provision shop, petrol station mart, or other retail outlet in Singapore.

As you can see, prices have been going up quickly. There I was, last week on a Tuesday evening, queuing up at the NTUC Fairprice supermart near my workplace, holding on to a basket containing a 2L bottle of Meiji fresh milk and 1 loaf of Gardenia high-fibre bread. I was expecting the tally to come to $6.60 ($4.60 for the milk, $2.00 for the bread), but it came up to $6.75. At first I thought that, oh, maybe the milk went up another 15 cents (which is probably a story for another time). But this time, when I finally took a look at the price tag, it was the bread that went up.

Some people, either those with a economic or trading bent, might call this a "price signal". The implication of this was literally staggering. I nearly fell off the step on the staircase. "WHAT THE (unprintable) ?!!!". That was when the notion came to me that, never mind the deflationist camp, this is inflation going exponential.

- In a rare moment with some spare time, I whipped up this spreadsheet. I have been buying this particular variant of bread every day or every other day for the past, maybe 7 years or so. It had been stable at $1.70 for as long as I could remember. So I'll call this the base price. The table quantitatively shows you exactly how much it had risen since the previous price (%, prev) and how much the price of a loaf of bread had gone up compared to the base price (%, base).

If you take a look at that last line, you will see what it was that was so staggering. I have not done the calculations prior to this spreadsheet, but here you are : it is up 7.50% compared to the previous price of $2 a loaf, itself a milestone of sorts. And it is up an earth-shaking 26.47% compared to around a year ago.

And they tell us that CPI inflation is up 3.6% year-on-year, with the food component up 4.3%. And that inflation such as it is calculated by CPI, is at a 16-year high.

Personally, I think that M3 money supply growth rate at over 20% year-on-year correlates better. Much, much, much better. But hey, there's more than enough blame to spread around. In case anyone has missed a lesson or two, typically bread is made from flour, and flour is made from wheat. So let's check out the historical wheat prices :

That is a chart of wheat futures prices. It is traded in terms of US$ per bushel. According to wikipedia, a bushel of wheat is about 60 lb or 27.215 kg. The chart is denominated in cents though, so you divide by 100.

You might have heard that the price of wheat doubled. So there it is, on the chart. In 2006, it was around $3-4 per bushel, and this year, 2007, it doubled to $8-9 per bushel. It really takes a longer-term chart to bring out this price pattern. Observe how the price remained stable at $2.50-$3 for 7 years before 2006, and then took off exponentially in 2007.

A few more years of this and they would have to start using log scale (10, 100, 1000, etc). We are probably well into the beginning stages of hyper-inflation. This is a historical photo of what hyper-inflation in 1923 Germany looked like :

Caption : Inflation 1923–24: a woman feeds her tiled stove with money. At the time, burning money was less expensive than buying firewood.

We are not at the worldwide money-burning stage yet, but if there are no major structural changes in the way our economic systems work, it looks like we could be headed in that direction.

(2007-11-27 13:38:56 SGT) [Biz] Permalink Comments [2]

Monday November 26, 2007

Singapore CPI inflation hits 16-year high

channelnewsasia.com :

Singapore's October consumer prices rose 3.6% from a year earlier after an increase in the Goods and Services Tax (GST), government data showed on Friday [23 Nov 2007]. It said that inflation averaged 1.6% in the first 10 months of the year and that the figures partly reflected a 2 percentage point rise in the GST to 7% on July 1.

Annual inflation in October rose on higher costs for food, and transport and communication. A sub-index for food, which at 23% has the largest weighting in the overall index, rose 4.3% in October from a year ago, while transport and communication, the second-biggest component in the index, climbed 4.3%.

businesstimes.com.sg :

The need for further policy action to stem price pressures - sooner rather than later - has grown with an unexpected surge in October's inflation rate to 3.6%. The market consensus estimate was 2.8 per cent. 'We thought we had a high inflation forecast for October at 3 per cent,' said HSBC Bank economist Robert Prior-Wandesforde. In fact, the latest rise in the consumer price index (CPI) has leapt well beyond these estimates. Climbing from a 2.7 per cent third-quarter average (itself a sharp jump from the first six months' 0.8 per cent pace), it was driven by rising food and oil prices, and is the highest monthly inflation rate since August 1991.

'I don't think it's a one-off (spike) to be ignored,' said Chetan Ahya, chief economist for South-east Asia and India at Morgan Stanley Asia. 'The risks of more policy reaction have increased with this latest data. One more month with figures like these may mean that the government needs to move quickly.' The urgency will be apparent if crude oil prices touch US$120 a barrel, he added. Most economists believe there will be further monetary tightening via a steeper appreciation of the Singapore dollar at the Monetary Authority of Singapore (MAS)'s next half-yearly policy review in April 2008.

- When I blogged about creeping inflation back in December 2003, it was already clear to me that inflation would be of increasing concern.

Back then, 1 litre of RON95 petrol had been at $1.213 for the longest time I could remember. It went up to $1.263, and I was complaining (then) about the 4.12% increase. And now, I take a look at Petrolwatch and note that the same RON95 grade of petrol is going for $1.956 - which is a 54.87% increase from $1.263 and a 61.25% increase from $1.213.

Back then, I wrote "screw the CPI. Us ordinary folks living in the real world are actually 6-8% behind, at least". Today, I say again, screw the CPI. The M3 data tells me we are closer to 20% behind on a year-to-year basis. Anybody got a 20% pay rise this year? If you did, good for you. I sure as hell didn't.

And, as I have expected, the blame-shifting has already begun. It was the 2% GST increase. It was rising crude oil prices. Rising food prices. But that is putting the cart before the horse. These are symptoms, not causes. The root cause, the one simple reason that all the economists and all the newspapers never tell us about, remains the same. Inflation is a monetary phenomenon caused by an increase in the money supply over and above the increase in available goods and services in the economy.

In my opinion, we are heading for an exponential increase in inflation.

(2007-11-26 12:57:10 SGT) [Biz] Permalink Comments [5]

Wednesday November 21, 2007

Crude oil hits $99.29

In a stunning overnight reversal, NYMEX crude oil went from consolidation around the $94-95 level to a new record high of $99.29 per barrel. That puts us within stone-throwing distance of $100 oil.

bloomberg.com :

Crude oil rose above $99 a barrel for the first time in New York as a weakening U.S. dollar increased demand for commodities. Crude oil for January delivery climbed as much as $1.26, or 1.3 percent, to a record $99.29 a barrel in after-hours electronic trading on the New York Mercantile Exchange.

See also :

1. Crude oil hits $98.03 (7 Nov 2007)
2. "It's going crazy" ($93.80) (29 Oct 2007)
3. Another day, another record ($92.79) (29 Oct 2007)
4. Oil rises to record $91.10 (26 Oct 2007)
5. Crude oil reaches record $90.02 after dollar drops against euro (19 Oct 2007)

(2007-11-21 09:53:21 SGT) [Energy] Permalink

Thursday November 15, 2007

US M3 hits 18%

peakoil.com (thread, thread) -> nowandfutures.com :

For most of 2007, US M3 money supply growth was hovering around 12-14%. That was already quite high. But in the past month or so, M3 has gone vertical and is now hitting 18%, as seen in this chart :

- Since we don't have instantaneous 2007 Q4 GDP figures, let's use, for now, 2007 Q3 GDP growth which was 3.9% year-on-year. That is, if we take the government's word for it. Supposing that we do that, we divide 18% by 3.9% to get 4.6.

So, on a year-on-year basis, US M3 money supply growth is outrunning GDP growth by over 4 times. That is highly inflationary, going by the classic definition of inflation. You see this manifest itself in higher prices : all the way from the NYMEX exchange to the increasing gasoline pump price, all the way from the wheat futures markets to the increasing price of bread at the supermarkets.

Is 2007 Q4 GDP growth going to make up the difference and bring down the M3-GDP outpacing? It could, but that is not likely. Despite a confident outlook by Sony's president, the heads of various logistics companies are reporting incoming shipments into ports such as Long Beach, California have "fallen off the charts". The traditional build-up for the Christmas shopping season doesn't seem to be happening this year like it should.

The ongoing housing market bust isn't helping either, and neither are the problems in the sub-prime and derivatives markets. Not to forget that next year, 2008, is an election year for the Americans. Elections are highly inflationary.

(2007-11-15 13:28:31 SGT) [Biz] Permalink

Monday November 12, 2007

A short history lesson on hyperinflation

Spotted at peakoil.com :

German Wholesale Price Index:

July 1914
1.0

Jan 1919
2.6

...

July 1923
194,000.0

Nov 1923
726,000,000,000.0

I chipped in with :

http://www.theoildrum.com/node/2660/201028

"If you study the German Hyperinflation, January 1918 through November 1923, one stock index share went from 126 to 23,680,000 million in nominal Reichsmarks ... however, if you measure the German stock market during this period in US Dollars (at that time backed in gold) ... the gain of 187,936 million times in Reichsmarks amounted to a 60% loss in US dollars."

(2007-11-12 00:14:10 SGT) [Biz] Permalink

Friday November 09, 2007

Pollution from marine vessels linked to heart and lung disease : study

greencarcongress.com :

Pollution from marine shipping causes approximately 60,000 premature cardiopulmonary and lung cancer deaths around the world each year, according to a report published online in the Articles ASAP section of the journal Environmental Science and Technology. The report benchmarks for the first time the number of annual deaths caused globally by pollution from marine vessels, with coastal regions in Asia and Europe the most affected.

Conducted by James Corbett of University of Delaware and James Winebrake from Rochester Institute of Technology, the study correlates the global distribution of particulate matter - black carbon, sulfur, nitrogen and organic particles - released from ships' smoke stacks with heart disease and lung cancer mortalities in adults.

The results indicate that approximately 60,000 people die prematurely around the world each year from shipping-related emissions. Under current regulation, and with the expected growth in shipping activity, Corbett and Winebrake estimate the annual mortalities from ship emissions could increase by 40% by 2012.

Ships run on residual oil - a byproduct of the refinery process which has sulfur content thousands of times greater than on-road diesel fuel.

- Fact : southern Singapore is home to PSA, one of the world's busiest shipping ports. Fact : southern Singapore is home to high-end residences that have been built or are being built near the coastline or around the nearby island of Sentosa.

Seeing how it is quite unlikely that those giant container ships, tankers and passenger liners hanging around the area are going to convert to nuclear, electric or some other sort of emission-free propulsion system anytime soon, I think there has got to be a collision between these two facts somewhere.

(2007-11-09 00:24:56 SGT) [Env] Permalink

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