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Stagflation May Be Upon Us

By    |   Friday, 06 July 2012 08:10 AM

Despite a sluggish economy, food and housing prices are on the rise.

Heat, low precipitation, small inventories, and global dietary changes are threatening higher food prices in the near term. As suggested more than two years ago, inflation may exist despite slow economic activity and growth.

Commodities such as food are essential to our basal metabolism, and the quantity demanded for these items remains relatively constant irrespective of price. Because demand is inelastic, a decline in supply can cause prices to rise precipitously despite an anemic economy. Increases in demand can further exacerbate the price rise.

Low soil moisture has undermined U.S. crop yields recently. The Department of Agriculture estimates more than 20% of the annual corn crop is in poor condition. Prices of corn and soybeans have risen by double digits in the past month, closing in on historic highs reached in 2008. In addition to falling supplies, demand for these products has increased as emerging countries consume more meat (animals feed on corn and soybeans).

Rents are also rising. According to REIS, a real estate data firm, average rent in the second quarter of 2012 is at record levels in 74 out of 82 markets, and the vacancy rate of 4.7% is the lowest since 2001. A rate under 5% has occurred only three times during the previous three decades. This suggests long-term demand for housing is low due to long-term economic and employment uncertainties. As a result, short-term demand, in the form of rent, is high, translating to lower supplies and higher prices.

The resultant economic dichotomy may be stagflation in the coming year.

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Friday, 06 July 2012 08:10 AM
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