Turkey prices hit an all-time high late last month—just in time for Thanksgiving—and were up 36% from the same period last year. Did your income go up 36% during the past year? Highly unlikely. In other words, your purchasing power in terms of turkey is going down. And it’s not just in terms of turkey, but in all kinds of food and energy, and soon most everything.




Yet do our government policy makers view inflation as a problem in the U.S.? Not according to the government and most press accounts. Based on the Consumer Price Index, inflation is barely rising at all. If anything, until recently economists have been worried more about deflation than inflation, concerned that businesses cannot raise prices much at all because of too much capacity and lack of demand.

But for people who want to plan their long-term financial futures, the odds of broad-based inflation have begun to rise. For example, a quick look at the chart below shows that cotton prices have risen very sharply and are now up 84% from about a year ago.


Cotton is used in a large percentage of the clothing that people buy, and the businesses that make clothing cannot afford to stabilize their prices at current levels. As also shown in the charts below, prices for coffee (+46%), corn (+45%), and live cattle (+19%) are on the same trajectory. As a result, pricing pressure on a whole range of products upon which American households—and many businesses, from Starbucks to Sara Lee—depend are about to soar.

How do businesses and consumers prepare for inflation? The amount of income that people earn on average is rising very little, if at all. The American consumer does not have much more purchasing power today than he or she did a decade ago. Americans are still heavily in debt, and many can no longer cash in on the equity value in their homes because they are under water—the current value of their homes is less than they owe on their mortgages.

As a result, in the short term, many Americans may feel that they face only one option: frugality. In the short term, perhaps, frugality is an answer.

Longer-term, however, the right answer may be to find and buy assets likely to appreciate in value faster than the rate of inflation. Real estate, precious metals, and gemstones seem to be the best candidates to fit that bill. Among these, real estate seems the most depressed; given the imbalance between supply and demand, there are some terrific potential bargains out there.

Women (and men) who are over the age of 40 or 50 face an especially acute problem. While people just entering the work force have decades to build retirement funds, hopefully making and saving more and more each year, an older cohort may only have a decade to do so. Their decisions today will make the difference between a comfortable retirement and a struggle.

Inflation is already a reality at the early stages of processing in the global economy. It may be hard to see in the government indices today, but next year will be a different story. It is time to prepare for a financial future that could be quite different from the past thirty years, when bonds increased substantially in value. Inflation is the arch-enemy of bonds. Bond investors benefit the most when consumer price inflation falls, and inflation has been falling for the past thirty years.

Fixed income could become a trap for the baby boomers as inflation takes off, eroding the purchasing power of fixed payments. We’ve just seen an example in our loss of purchasing power as measured by turkey. It’s not as silly as it sounds. In fact, the loss of purchasing power—and our standard of living—as measured by most goods and services could be quite profound. Be on guard.