Thursday, January 20, 2011

Inflation Strikes!

The headline “Inflation Strikes!” probably caught your attention, writes Dr. Dave Kohl. Let’s take this issue a little bit further. According to Kohl, when the news media reports on inflation, core inflation is a docile 0.8 percent, well under the 1.0 percent ideal rate. Headline inflation, which includes food and energy, is 1.6 percent, below the 4.0 percent target - a 50 year average.

In Kohl's seminars many agricultural groups question these numbers. First, let’s go globally and examine the number two economy in the world, China. Overall, inflation is in the mid-4 percent range in China. Isolating food, the inflation rate is nearly 12 percent. Many in Chinese leadership are concerned with this high rate of food inflation, because it could result in social unrest and possible food shortages and hoarding.

For the agricultural industry, inflation is approximately 4 to 8 percent depending upon the segment and location in the country. For example, fuel, fertilizer, feed, cash rents, and, yes, the appreciation of land values, medical, and education costs are indicative of a higher inflation rate. So why such low rates of inflation in the general economy? This is the result of less expensive airline tickets, some consumer goods, and housing costs, which have been in a deflationary spiral.

It will be interesting to see what happens to interest rates. In the past sixty days, mortgage interest rates have increased over 60 basis points. Inflation in interest rates could be very detrimental to profit margins in farm businesses.

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