There's a much bigger threat looming than the housing crisis and possible recession that get all the attention. Unfortunately, economic and political leaders ignore the threat, and the only people who seem to be worried about it are ordinary folks on Main Street.
Inflation is back with a vengeance. Oil prices have topped $100 per barrel, and gas prices look poised to climb back above $4 this summer. Everyday expenses from food to health insurance are jumping through the roof, straining people's already tight budgets. Prices at the consumer level rose 4.3% over the past year, and costs earlier in the supply chain are rising at a much faster pace.
Producer prices and you
The release of the producer price index earlier this week brought unexpectedly bad news. Prices of finished goods rose a full percentage point in January, bringing their 12-month change to 7.4%. That's the biggest yearly rise since 1981, during the aftermath of the inflationary spike that followed the oil price shocks of the 1970s.
More alarming is the fact that prices for products earlier in the production chain rose even more steeply. Costs of intermediate goods rose 8.8% in the past year, while crude goods were up a staggering 31% from last year's levels.
Yet many economists remain unconcerned about inflation. One reason is that core inflation -- which excludes the volatile food and energy portions of the index -- remains relatively low. Another is that a different set of inflation data -- the price index calculated with GDP estimates -- suggests a lower inflation rate of 2.7% in 2007.
A no-win scenario
During his testimony before Congress, Fed Chairman Ben Bernanke argued that inflation is likely to moderate over the next year, with the expectation that energy prices will stabilize.
Rising costs at the producer level put investors in an unenviable dilemma. If companies are able to pass higher costs on to consumers, then costs of living will continue to rise at an accelerating rate. On the other hand, if businesses can't raise their prices to recoup higher costs, then profits will fall, hurting stock prices and causing investors to lose money.
Already, the battle lines are being drawn. Airlines are looking for ways to cover higher fuel costs, with UAL's
Similar actions throughout the business world have investors concerned. From higher costs on coffee prompting Starbucks
What to do
From an investment standpoint, higher costs have created large windfalls for some industries. For instance, companies that serve the agricultural sector, such as Monsanto
Identifying industries that will benefit from higher costs for base materials is essential to protect your portfolio. Without that protection, if businesses end up having to absorb higher production costs, then ailing corporate profits will likely show up in lower brokerage account balances for investors. Yet as bad as falling stock prices would be, they might turn out to be less painful for the overall economy than if inflation heats up further on the consumer level.
For more about the challenges facing the economy, read about:
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Fool contributor Dan Caplinger already dreams about spending down his retirement accounts. He doesn't own shares of the companies mentioned in this article. Kraft Foods is an Income Investor recommendation. The Fool's disclosure policy is always cool, calm, and collected.
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