Posted 6/26/2008

INFLATION: YOU WERE WARNED

Consumer inflation is running about 7 percent.

Import prices are up 17 percent. This means even higher inflation.

Everybody talks about "price inflation." But until a week or so ago, nobody was warning about "cost inflation."

Cost inflation is vitally important because it's what makes price inflation stick, by squeezing the margin between cost and price.

But you shouldn't be surprised. Not if you were reading Uncle Wisdom last year.

He warned of a big worldwide inflation which would be caused by rising costs squeezing producer margins.

Just click on Inflation Tsunami Coming? and see.

When the price of corn was hitting new highs this year, farmers were worried.

Why? Because the costs of producing corn were going up just as fast. Seed, fertilizer, equipment, fuel and land were, in some cases, going up faster than the prices of corn, wheat, soybeans and rice.

This means that farmers will not go all out because the price of corn is a commodity, subject to sudden collapse. But the costs of seed, fertilizer, equipment, fuel and land go down much more slowly. A farmer can go broke with higher prices if his costs go even higher.

When the price of gold pushed $1,000, the gold mining companies were expected to get rich. But mining costs went up even faster and one big company shocked the financial world by reporting lower profits.

The cost squeeze on John Deere has flattened its USA profits. Luckily, it gets higher prices overseas.

Oil companies have not prospered equally in the face of $130 oil. Valero, the country's largest refiner, has seen its margins squeezed between high crude costs and slower rising consumer prices.

There are many investments which can be made to insure your portfolio against a rising cost inflation. You could have bought the fertilizer company stock and skipped the cereal company stock. You could have bought the oil explorer stock and skipped the oil refiner stock. You could have bought the mining equipment maker stock and skipped the mining company stock.

You could have done all that if you had been reading Uncle Wisdom last November.

(click here for a printable version of this article)