The Consumer Price Index rose 0.4% in January, according to the Department of Labor, the second month in a row in which consumer prices have jumped. The so-called core inflation rate, excluding volatile food and energy prices, increased by 0.2%, the largest uptick in more than a year.
Have price increases begun to hit Morningstar.com users in the pocketbooks? And if so, were they taking any steps to hedge? To find out, I recently posted the following query in the Personal Finance forum in the Discuss section of Morningstar.com:
"Are you seeing signs of inflation in your daily life? And if so, where? Please weigh in here, and also share whether it's affecting your portfolio positioning."
To read the complete thread, or offer your opinion about whether you're observing an inflation hit your own household budget, click here.
Pain at the Pump
Many users indicated that yes, indeed--they're seeing rising prices, especially for food and gas. Rising health-care costs also appeared on several posters' lists of inflationary hot spots.
Jomil sarcastically opined, "I'm not seeing any signs of inflation--only price increases in food, water, power, insurance, rent, gas, tuition, construction, taxes, and clothing. Did I leave anything out?"
FidlStix summed up where inflationary pressures are converging, and noted that some of these costs are excluded from the government's core inflation rate: "Everywhere I look, I see bright-red neon signs flashing 'inflation.' We're taking care of my mother-in-law, and her medical costs are going up. Food and gas prices are spiraling toward the stratosphere. Of course, these two don't count because they're volatile areas that are arbitrarily left out of most inflation indexes."
Hillcountry wrote: Food, fuel, utilities, and medical are the most obvious. When you are retired, what else matters?"
Capecod argued that even modest inflation in food and energy prices, combined with still-constrained wage growth, exacts a toll on consumers. "Core inflation remains subdued, while food and energy are causing modest increases in gross CPI. Of course, as long as wages in the U.S. are constrained by excess capacity, higher food and energy costs simply act like taxes, diminishing all other consumption. And unless we give the Fed permission to drill for oil and grow more soybeans and corn, there's nothing they can do about it--since these are not monetary phenomena."
Riprock noted that rising fuel costs make him grateful for his career change: "I'm a former over-the-road mover. I was an owner-operator and paid for my own diesel. On the way to work every day now, I pass a gasoline station sign that posts its diesel price. It's an urban gas station and high-priced. I have watched the price of diesel fuel just continue upward on that sign during the last six months. That cost increase gets passed straight on to consumers. Glad I'm not in the business anymore."
Goldnik noted that higher gas prices has led to higher costs in other consumer products, as well. "Gasoline is up more than down; I think most higher prices are related to the price of gasoline."
Matthew9 put rising gas prices in context: "Gasoline prices are the most visible, but they're still very low compared with those of most other developed countries. I expect gasoline to hit $4 per gallon on average by the end of 2012 or before."
Grocery Day Blues
SWATCHER1, and many other posters, has spotted inflation in the grocery store, noting that food companies are shrinking products as a backdoor way of passing on higher prices to consumers. "The advertised prices haven't risen noticeably," this poster wrote, "but the quantity (volume) has been steadily lowered. Tuna (canned) is now at 5 ounces per unit. Ice cream went from 64 ounces to 48 ounces. Cleaning products are also a part of the quest to somehow keep the same price point, but forsake the volume offered. Interestingly, like lemmings, it seems as though all of the manufacturers somehow seem to follow in lockstep with their competitors."
Rising food prices, especially in the produce section, also top CAloha's worry list: "The price of food, especially fresh fruits and vegetables, is soaring beyond any point I have observed in my lifetime of 71 years. It is scary to see celery at $3 a bunch, and romaine lettuce at $1.79 a pound, forget it if you want to go organic!"
Matthew9 correctly noted that inflation is a global phenomenon. "Food prices are also up a bit but after years of very little food inflation, this comes as no surprise. As developing countries continue to demand more goods and natural resources going forward, I certainly don't expect to see prices come down any time soon."
VprTux has witnessed rising global food prices firsthand: "I have traveled to various countries in the last two years and have seen an incredible rise in the price of food, especially vegetables and spices."
Goldnik opined that higher food prices make it even more important to shop the sales. "Butter has gone from $1.90 to $2.90 or more per pound in the last six months. A whole chicken went from $0.59 per pound in 2007 to more than $1 then back to $0.89 � but I just bought four for the freezer. Sizes smaller--yesterday sugar was available in a four-pound bag instead of a five-pound one. There are still deals to be found; I bought flash frozen flounder for $1.98 per pound yesterday."
Other Inflationary Pressures
While food and energy were by far the most frequently mentioned inflationary forces at work currently, users ticked off other areas where rising prices had hit home.
Gredwards wrote simply, "Two daughters in college, education inflation is crushing our household."
For Rossby, an insurance premium increase compounds the pain of high fuel costs. "Got my RV insurance renewal today and the premium has increased 29.1%. The rate increase was needed due to the higher cost of doing accident repairs. Oh well, the $109 increase would only fill the gas tank halfway with unleaded gas, which has gone up 20% in the last year."
Poster jeef1970, meanwhile, forecasts a spike in apparel prices. "I work in finance in the retail industry, and we are seeing costs for our fall 2011 purchases increasing by 20%-30%. This is driven by the increase in commodity costs as well as increased labor costs in China. Industry peers are either removing quality from their garments to offset rising costs or plan on raising prices. Particularly with cotton garments, I would expect to see some very significant increases which will hurt the lower-price-point retailers. There have been a few articles discussing this in the past few weeks, but I don't think the majority of the financial news industry nor the markets are catching on yet. Margins are definitely going to be subject to a lot of pressure in the back half of the year. It will be interesting to see how the consumer reacts. Unlike the food industry, we can't hide or pass on the increases by reducing the size of the packaging."
Alonzo supplied a laundry list of higher costs that were hitting him in the pocketbook, including groceries and gas, of course, but also higher health-club dues, vet bills, parking meter fees, and airfares, among other costs.
Honzik2352 noted that rising prices has recently interfered with his investment shopping: "I love to buy stocks, but they are much more expensive now, compared with what they used to be. I call it inflation, and, surprise, I feel it is bad for those who buy stocks!"
What Are You Gonna Do?
While many users pointed out that prices were rising, fewer had decisive prescriptions for it.
FidlStix summed up the confusion with this post: "I'm still wracking my brain trying to decide how to adjust my portfolio in response to the warning signals. I think I'll end up not changing anything."
Chang wrote, "I am looking at reducing my average bond fund duration and allowing credit quality to go a little lower (except for municipals)."
John883 was positioning his portfolio in the expectation of market volatility and the threat of higher inflation: "I moved to a passive investment strategy for my retirement accounts. This was mostly done to reduce the implementation cost in the event that the markets stagnate for some period. Forty percent of said passive investment is in foreign (non-U.S. dollar) funds as part of an aggressive investment style as well as to protect against a weak U.S. dollar."
Alonzo's inflation-fighting prescription was more elaborate. "My strategy during the past year: One, move out of consumer staples (compressed margins, substitution of store brands) such as Kimberly-Clark (KMB) and Clorox (CLX); food processors Cal-Maine (CALM), Kraft (KFT), again higher input costs and compressed margins. Two, keep high-yield bond portfolio to under three-year maturities; add to MLPs (such as Energy Transfer Partners (ETP), Suburban Propane Partners (SPH)) for additional income. Three, build positions in basic materials (Southern Copper (SCCO)); energy/energy-related ( Conoco-Phillips (COP), Transocean (RIG), Weatherford International (WFT), Southwestern Energy (SWN), Peabody Coal BTU, Fluor (FLR)); food production derivatives ( Deere (DE), Potash (POT), DuPont); gold ( Agnico-Eagle Mines (AEM), SPDR Gold Shares (GLD)). The general idea is to look for companies that have pricing power and few substitutes, and benefit from a weaker dollar."
Jomil added this perspective: "I just plunked some money into two riskier income funds, but I am not confident that any type of financial paper can save us from the perils of uber inflation. But we're not there, yet."
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