By Daryl G. Jones, contributor, managing director
Hedgeye

Last Friday I had the opportunity to appear on The Kudlow Report to discuss gold and inflation. It was a spirited discussion, and while Larry Kudlow is largely in our camp that what we are experiencing is in fact inflation, some of his other guests, namely Jack Bouroudjian, disagreed, suggesting that inflation was still years away because of the slow domestic-growth outlook over the next couple of years.

At Hedgeye we’ve been calling for inflation consistently throughout the year, citing as the primary catalyst a weak, and weakening, U.S. dollar. As the
Fiat Fools
(our nickname for the politicians who support a weak dollar) in Washington debase the national unit of currency, prices of goods priced in dollars inflate. It is that simple.

Instead of looking at government-produced data as evidence of inflation, we’ve been focused on real-time prices. My colleague Howard Penney noted headlines that showed up yesterday on his Bloomberg terminal, including these:

• Gold Futures Surge to Record as Dollar Tumbles on Fed’s Policy Statement
• Cotton Rises, Extends Rally to 15-Year High as China Increases Purchases
• Orange-Juice Futures Advance to Three-Year High on Florida Storm Concerns
• Lumber Futures Jump Exchange Limit as U.S. Housing Gain May Revive Demand
• Sugar Drops on Reduced Concern About Supplies From Brazil; Coffee Climbs
• Uranium Prices at 10-Month High Attract Hedge Funds, Investors, UxC Says
• Rusal Sees Aluminum Rising to $2,400 to $2,500 Next Year on Chinese Demand
• Hog Futures Rise on Signs of Shrinking U.S. Meatpacker Supply; Cattle Gain

While they don’t constitute scientific data, these headlines make it almost laughable to suggest that inflation is not occurring globally, and yet the Federal Reserve, led by Chairman Bernanke, stated yesterday:

“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”

Prices of “building blocks” are rising

Interestingly, Chairman Bernanke and the Federal Open Market Committee may be among the few, even in America, who do not see inflation. Specific to this, the prices of cotton and food inputs, basically the building blocks of consumption, are accelerating and beginning to squeeze the average American.

Another global inflationary signal relates to major food inputs. Below is the CRB Foodstuff Index, which incorporates the following food inputs: butter, cocoa, corn, hogs, lard, soybean, steers, sugar, and wheat. This index has accelerated dramatically off of its June lows and is up almost 35% on a year-over-year basis. If a year-over-year price increase of the 35% doesn’t imply some form of inflation, then we aren’t sure what does.

Our Retail team, led by Brian McGough, recently highlighted another key inflation data point for our subscribers, writing, “look at the recent move in cotton. Yes, the recent spike puts it into the ‘statistical aberration’ bucket. Anomalies or not, it is an economic reality, and a 50% boost in the industry’s biggest cost input must be dealt with.”

Cotton is, obviously, one of the key inputs in making apparel, and it is at a 10-year high. Ultimately, inflation in cotton prices will be felt throughout the apparel supply chain. Either the consumer will have to pay higher prices or else retailers, apparel makers, and/or vendors will have to eat the difference.

As I said, the primary driver of inflation is the continued debasement of the U.S. dollar. As the U.S. dollar declines, the cost of goods and materials priced in U.S. dollars will increase.

In our opinion, the main reason we are seeing all-time highs in gold is that investors and sovereign wealth funds globally are looking to protect their wealth from the debasement of fiat currencies. That is, they are aggressively hedging against future inflation.

So, yes: We see inflation . . . and so do all Americans who buy food and clothing. Maybe it’s time Chairman Bernanke went shopping?