…Inflation enters the economy in stages….and we are now in the second stage…and this is when things start to get REALLY ugly for the economy. [Let me explain.]
This version of the original article, by Graham Summers, has been edited* here by munKNEE.com for length (…) and clarity ([ ]) to provide a fast & easy read. For the latest – and most informative – financial articles sign up (in the top right corner) for your FREE bi-weekly Market Intelligence Report newsletter (see sample here)
The first stage occurs in the manufacturing/ production segment of the economy when you see producers suddenly paying more for the raw goods and commodities they use to manufacture/ produce finished goods. You can see this development in the chart below. #munKNEE.com is being given away – check it out!
- The highlighted periods featured times in which Producer Prices for commodities or raw goods spiked [and] approached record highs.
One or two months of higher Producer Prices for commodities or raw goods is no big deal, but once you’re talking 6-8 months of steadily rising Producer Prices it’s significant:
- At that point, manufacturers/ producers have to start raising the prices of finished goods or face shrinking profit margins.
- At that point, you move into the second stage of inflation: when the prices of ordinary objects begin to increase.
…Phase 2 can happen in different ways. Management at companies doesn’t just say “raise the price now!” Instead, they can do different things:
- They can charge the same amount for less of a finished product, i.e., shrink the size of the container. This is called shrinkflation.
- …They can start using cheaper/ lower quality raw goods (to reduce costs/quality) while charging the SAME amount for the finished good. This too is inflation as the cost of the SAME item is MORE expensive, though it’s being masked because the QUALITY is LOWER and the price is the same.
We are now at THAT stage of inflation…and this is when things start to get REALLY ugly for the economy.
The bond market knows it…as it continues to blow up with yields on the all-important 10-Year US Treasury retesting their recent highs. Bear in mind, this is happening at a time when the U.S. is planning a $1.3 trillion deficit next year and will be relying heavily on the debt markets to fund this.
This is a massive deal. This is effectively the bond markets telling the U.S. that if it wants to issue debt, it’s going to cost a lot more, and this is happening PRECISELY when the U.S. is planning an astonishing $1.3 trillion deficit.
Mark my words… 2019 will be when the U.S. debt crisis hits.
(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.}
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