A few weeks back, I preached about how the Federal Reserve's actions were destroying our economy by rescuing our fellow Americans who engaged in greedy and detrimental activities. In the face of the gigantic financial mess we've created, however, our leaders have relaxed, sat back, and lowered rates, thinking they had an easy solution to a challenging problem.
Well, their efforts finally shone through yesterday, in the inflation numbers that were released. I've warned that inflation has been a problem for some time, and now the numbers reflect it. For example, we're experiencing the worst food-price inflation in 17 years, and panic over escalating prices seems to have finally set in.
Numbers don't lie
Maybe the commentators in the media don't eat and drive, or maybe their paychecks are so large that they have someone to venture to their local grocery and gas station for them. Regardless, they're out of tune with how expensive the cost of living has become. For a long time now, they've waved off the rising prices by consistently focusing on the core inflation figure that strips out the energy and food costs. On that basis, inflation still hasn't looked so bad this time around. But I call that a fantasy figure. The reality is that food and fuel are essentials, so the 1.2% rise in food costs in March and 1.3% jump in gas is likely to sting the average consumer.
Retailers across the board are struggling for a multitude of reasons. Homeowners who can't afford their mortgage don't have discretionary income to throw around. Rising unemployment hasn't helped, either, since those without jobs have no inflow of money. Even the well off are decelerating their spending habits, as the beaten-down stock market has left them feeling less wealthy. But our major problem is that consumers are cash-strapped as a result of inflation.
Rocketing commodity costs have laid the foundation for the series of increasing prices that get passed through the supply chain. According to the USDA, egg prices were up 25% year over year in February. Milk and dairy products rose 13%. And chicken and poultry increased 7%. Accordingly, consumer-goods companies such as Kraft (NYSE: KFT ) and Tyson Foods (NYSE: TSN ) are forced to raise prices to curtail slimming margins, and those higher prices are passed on to food retailers. Meanwhile, restaurant chains have been forced to offset rising input costs: Cheesecake Factory (Nasdaq: CAKE ) raised its menu prices 1.5% in February, and a Chipotle (NYSE: CMG-B ) in New York City increased its prices by almost 10% in March.
But Mr. Bush, I thought you wanted to stimulate the economy!
A commercial I saw on television this weekend reminded me of the check I'm about to receive in the mail from our generous government. This ad not only reinformed me about my forthcoming stimulus tool but also urged me to unwisely spend my $600 and "do my part" in rousing our economy by spending the money at my local businesses.
Little does our president know that I, like many of my fellow responsible citizens, will be saving the money to help keep those expensive eggs and cartons of milk in my fridge and the gas in my fuel tank. The fact that our government is encouraging our debt-laden nation to spend money on materialistic items we don't need instead of use it to pay off what we already owe is another article all to itself.
My point is that with unemployment rising, basic economics tells us that getting a raise is out of the question -- especially in a slumped economy. Static income coupled with escalating costs doesn't make for a good situation, and it means I'm going to need that government cash to sustain my everyday basic lifestyle. We saw in the March sales report that even some of the strongest retailers posted double-digit declining comps, but when it's all said and done, there won't be much left over from our checks for purchasing a new gadget at Best Buy (NYSE: BBY ) or Apple (Nasdaq: AAPL ) for "stimulation" purposes.
But let's assume for a second that we do go out and spend our money frivolously. Your spending spree still isn't going to do the good you might think. Having everyone run out and spend this money will only fuel the fire, since putting every American on an even playing field with additional "income" will only generate additional inflation. Besides, with prices rising, that $600 you might get won't stretch as far as everyone anticipates.
Look what I can do
As the mediator of the discount rate, the Fed holds a powerful tool in helping to keep our economy in check. But our recent captains at the helm have veered us in the wrong direction. Alan Greenspan's lengthy span of "free money" instigated the housing bubble, and Ben Bernanke's reaction to the bubble's collapse is crushing the value of the dollar and has sent the cost of living on a steady upward march.
I've said it before, and I'll say it again. The government and the Fed have been wreaking havoc on our economy. Investors may have cheered on those rate cuts last year, but look what's happening now. Our economy would have stalled a bit from the housing and credit problems, yes, but these issues needed to be worked out on their own, not with the help of the Fed. Now, the cost of living is becoming unaffordable at the expense of those who created the financial mess we're caught in.
The Fed meets again later this month, and although analysts have reeled in their expectations for another notable rate cut, they still expect something. To which I say: bring on the ramen.