Thursday, April 14, 2011

Commodities and My Budget

Reality often stumps the official figures. The statistics that are relayed to us about such matters as inflation and house prices don't seem to portray what is really happening. The people on Main Street with the middle-class incomes and the middle-class expenses are not fooled.

Since August, 2010, commodity prices have been on a tear. The increases have been notably parabolic since the US Federal Reserve decided to print more money with their Quantitative Easing 2 (money printing) scheme. Prices that increase in the spot markets usually take about 3 - 6 months before they translate to the Supermarket shelves.

This is now beginning to happen in New Zealand.

In New Zealand, the official inflation rate is touted as being around 4%. But what are we actually looking at? Inflation is measured on a basket of goods and services and is adjusted for the likes of hedonistic qualities of some goods. For example, if the iPad 2 is the same price as the iPad 1 (which it is) then their must be some deflationary aspect going on, therefore this creates downward pressure on the inflation rate. But technology is always finding new efficiencies in production. It skews what is actually happening.

In the USA, if the old way of calculating inflation is used (in 1980s) then inflation is more than 10% as opposed to the 3% currently quoted. The method has changed in NZ to.

Change the method, fool us even more? I wonder. Without doing the sums, maybe our inflation rate is much higher than reported.

But as I said above, are we fooled. We are the ones buying the food each week and noticing the shopping basket getting smaller, but the prices getting larger.

One of the reasons given for the latest riots in the middle-east (and noticeably France and Britain) are because people are finding it more difficult to pay their food bills. Food availability has a most terrifying affect on the psyche of people. It's called the survival mentality, and politicians better watch out if it gets too wound up.

Naturally, governments do not want reported inflation to be too high. This causes a demand for higher wages and causes higher interest rates on their (our) debt. Not good for the bottom line.

If you can fool the punters long enough, then the government can continue to spend to oblivion. It can afford to borrow for programmes in cannot afford (and maybe to gain the votes it needs)

But for how long will we be fooled? How long will we remain silent? We don't want people to suddenly snap in desperation. We have all played a part in the spending spree of the 'naughties' (2000 - 2008) and must all play a part in the solution.

That means spreading the pain evenly and looking out for each other. Times are going to get tough and we don't want to see what desperation can do.

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Articles of interest:

'Inflation? Well... iPad 2 costs the same'
See article here
The Straits Times

New Zealand Inflation Calculator

see here
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