checkthemarkets.com - No Inflation? Don't Drink to That Notion

No Inflation? Don't Drink to That Notion

Written by Marc Courtenay

Thursday, 27 August 2009

                                                                                                                            Adolph Coors (Bottom Photo)                                                                                                                          (1847-1929)
                                                                                                                           Adolph Coors Co., Golden, Colorado

               Adolphus Busch (Top Photo)
                          (1839-1913)
Anheuser-Busch Brewing Association, St. Louis, Missouri                    Photos compliments of BeerHistory.com

People on Social Security income won't be getting a raise in 2010 because, as they were told, the Consumer Price Index actually went down in 2009 and not up. We are witnessing the last gasps of deflation here in the western world.

The Associated Press reported that the nation's top brewers said Tuesday they plan to raise prices this fall, even as some of their top brands are seeing sales volume drop.

Anheuser-Busch, (NYSE:BUD) maker of Bud Light and Budweiser, and MillerCoors, maker of Blue Moon and Miller Light, both say they're going to raise prices.But neither brewer would say how big the increases would be.

Pete Marino, a spokesman for MillerCoors, said the increases will be made on a local basis, depending on the market.

"Pricing has been very strong on the MillerCoors portfolio and we believe that we can take a moderate price increase in the fall," he said.

Price increases have been helping insulate revenue results for MillerCoors, a pairing of SABMiller's U.S. unit and Coors Brewing Co.(NYSE:TAP), from the increasing trend of consumers limiting their spending.

Anheuser-Busch (NYSE:BUD) said in a statement it plans on raising prices on a majority of its volume in the bulk of its markets this fall too, to cover some increases in its costs. "The markets have been assessed, and we'll be acting on a by-market, by-brand and by-package basis," according to the statement from the company, the St. Louis-based North American unit of Anheuser-Busch InBev.

Sales of Miller Lite -- MillerCoors' flagship -- and Bud Light -- the top brand for Anheuser-Busch -- have both been suffering amid the recession.

Prices across all beers, however, have been rising. In 2008 the price of beer, ale, and other malt beverages sold for at-home consumption rose 5.3 percent, according to the government's Consumer Price Index. As of July, prices on those same items were 4.6 percent higher than they were a year ago.

How's the outlook for inflation over the next 5 to 10 years? If government spending and deficits play a role in the debasement of the currency and the buying power of the dollar, you might not like the answer.

In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion -- more than the sum of all previous deficits since America's founding. And it says by the next decade's end the national debt will equal three-quarters of the entire U.S. economy.

The grim deficit news presents President Obama with both immediate and longer-term challenges. The still fragile economy cannot afford deficit-fighting cures such as spending cuts or tax increases. But nervous holders of U.S. debt, particularly foreign bondholders, could demand interest rate increases that would quickly be felt in the pocketbooks of American consumers.

Some investors will take this as a reminder that ETFs like TIP, GLD, and SLV may be a smarter longer-term investment theme than many first thought. The same would be true for the POWERSHARES DB COMMODITY INDEX TRACKING FUND (NYSE:DBC), which is supposed to track the performance of a "basket" of commodities represented by the Deutsche Bank Commodity Index.

Some of the commodity-based closed-end funds like ASA Ltd.(NYSE:ASA) and The Central Fund of Canada (Amex:CEF) would also be attractive as long-term accumulation investments to prepare for the specter of either stagflation, or worse yet, hyperinflation.

According to the A.P. report the summer analyses by the White House budget office and by the Congressional Budget Office reached similarly bleak conclusions.

The CBO's 10-year deficit figure was smaller -- $7 trillion -- but that is because it assumes that all tax cuts put into place in the administration of former President George W. Bush will expire on schedule by 2011. Obama's budget baseline, however, hews to his proposal to keep the tax cuts in place for families earning less than $250,000 a year.

Both budget offices see the national debt -- the accumulation of annual budget deficits -- as more than doubling over the next decade. The public national debt, made up of amounts the government owes to the public, including foreign governments, stood Tuesday at a staggering $7.4 trillion. White House budget officials predicted it would reach $17.5 trillion in 2019, or 76.5 percent of the gross domestic product. That would be the highest proportion in six decades.

Congressional Budget Office director Douglas Elmendorf said if Congress doesn't reduce deficits, interest rates are likely to rise, hurting the economy. But if Congress acts too soon, the economic recovery -- once it arrives -- could be thwarted.

"We face perils in acting and perils in not acting," Elmendorf told reporters.

David Walker, former head of the Government Accountability Office, said the numbers illustrated the need for a national commission that would review spending and taxing options and present lawmakers with a deficit reduction plan that Congress could approve or reject.

"We're going to have to do a hard course correction once we turn the corner on the economy," Walker, now president and CEO of the Peter G. Peterson Foundation, said.

Both Romer and Obama budget director Peter Orszag said this year's contraction would have been far worse without money from the $787 billion economic stimulus package that the president pushed through Congress as one of his first major acts.

So my friends, don't raise a glass of suds to the downfall of inflation. If you're going to pop the lid on a bottle of brewsky, drink to the fact that the inflation handwriting is on the wall and we all can do something to prepare for it.

DISCLOSURE: I own some CEF, GLD, and SLV and I want to buy some ASA when the price gets more reasonable.

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