FISCAL COMMENTARY:

Thinking About Prices

by Fred Cederholm
The CPI rate has been minimized to 1.6% by excluding 75% of household expenditures on energy, food and housing. Therefore—since CPI is used as the COLA basis for adjusting pensions—there have been zero increases to Social Security in two years!

I’ve been thinking about prices. Actually I’ve been thinking about gasoline, energy imports, North Africa and the Middle East, the CPI, COLAs, pensions, and Social Security. I just topped off my PT cruiser over the weekend, and it cost me over $35.00 for a half a tank. When I received the car on June 19th of 2000, a full tank of fuel cost me just over $32.00! THAT is well over a 100% increase in the ten years which may not seem so bad. Actually, that recent jump has come mostly over the past 3 years since the recession/ depression began in late 2007. Gas had gotten down to $2.10 a gallon in 2007 and we were about $0.20 less than the national average for some reason (?) at that time. Now we are paying the same as everyone else in the country at just over $3.55 a gallon. I don’t really HAVE to drive that much, so I get off pretty well at the pump. Others are not so lucky...

You see there is probably nothing so “across the board” with an almost immediate impact on prices than what we pay for energy. The fuel price increases are passed along immediately to consumers for everything that is shipped. And... just what is there that isn’t put on a train, a plane, and/ or a truck to get it to where we buy our “things?” These are “natural” (in the sense of automatic and beyond our control) increases in the wholesale to retail pricing of our food, our clothes, our gadgets, our electronics, and our other consumer durables.

In our present trade deficit from December (figures released February 11th), the goods deficit increased $2.3 billion from November to $53.6 billion, and the services surplus was virtually unchanged at $13.0 billion! The December figures show surpluses (in billions of dollars) with Hong Kong $2.2 ($1.9 for November), Singapore $1.3 ($0.5), Australia $1.2($1.2), and Egypt $0.7 ($0.4). Deficits were recorded (in billions of dollars) with China $20.7 ($25.6 Nov.), OPEC $8.3 ($7.0), European Union $6.6 ($7.1), Japan $5.9 ($5.8), Mexico $4.7 ($5.6), Canada $3.9 ($1.7), Germany $3.3 ($3.1), Ireland $2.6 ($2.3), Nigeria $2.5 ($1.7), Venezuela $2.0 ($1.6), Korea $0.7 ($1.6), and Taiwan $0.6 ($0.8).

So much of what we buy has traveled from places we have never seen and will never visit in our entire lifetimes. When I look at the labels, there are times I have to TH*NK just where in the heck THAT country is! As I sit and wait for trains on their way to (and from) Global III (the world’s largest rail inter-modal exchange) in Rochelle, I often wonder was the origin of those thousands of containers per day that pass thru my little hometown on their way to get to the marketplace? What is the value? And now, I even wonder what was the “increase in prices” since leaving their site of origin? The rate of the increases is accelerating. Just where will it all end? I wish I knew...

We continue to depend on foreign suppliers for well more than two-thirds of our current energy consumption - with an ever-changing mix of suppliers. The top eight sources of Uncle $ugar’s crude oil imports for December 2011 (released February 25th) were: Canada (2.064 Million barrels per DAY--MBPD), Mexico (1.223 MBPD), Saudi Arabia (1.076 MBPD), Nigeria (1.024 MBPD), Venezuela (0.825 MBPD), Iraq (0.336 MBPD), Angola (0.307 MBPD), and Brazil (0.271MBPD). Uncle $ugar’s top eight sources of total petroleum imports for December 2011 were: Canada (2.713 MILLION barrels per DAY--MBPD), Mexico (1.365 MBPD), Saudi Arabia (1.087 MBPD), Nigeria (1.070 MBPD), Venezuela (0.717 MBPD), Russia (0.517 MBPD), Algeria (0.484 MBPD), and Iraq (0.336 MBPD). Total crude oil imports averaged 8,631 thousand barrels per day in December, which is an increase of 23 thousand barrels per day from November 2010. Crude in March is now over $105.00 per barrel. April futures contracts for Brent Crude now price it at $1.17point 77. Every Dollar of increase per barrel equates to an increase of almost $0.03 per gallon at the pump.

The events taking place in North Africa, and the Middle East are having a significant impact on world energy prices. These impact the price of everything here in the US. Predictions now as to the price per barrel are all over the map --- $150.00 per barrel to $250.00 per barrel. Realize that when Oil gets above $135.00 the global economies contract! Remember also that we are already in a contraction. Uncle $ugar tells us that our inflation rate (CPI – Consumer Price Index) now, EXCLUDING energy, food, and housing; is annualized at a trivial 1.6%. This is a significant factoid from Uncle, because this is what is used as the COLA basis for increases to most pensions, and Social Security. There have been zero increases to Social Security in two years! It really helps to exclude the costs of energy, food, and housing, since these make up OVER 75% of most American household expenditures. Does it NOT?

Number manipulation is clearly the name of the game. Prices are rising, and are expected to go much higher in the coming months. How high? Well, officially that depends on what Uncle chooses to tell us. I predict gasoline at over $4.00 per gallon before Memorial Day and the start of the Summer driving season, but what do I know? Remember that the Bureau of Labor Statistics has told US/us that unemployment/ underemployment has leveled off and with the net 192,000 jobs “created” last month has just “improved” to 8.9%. Makes you want to cash out on all those “stock profits” and buy the Brooklyn Bridge, doesn’t it?

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2010 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.



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This story was published on March 7, 2011.