Graham’s note: this is a continuation of Monday’s article which was an excerpt of a client letter I sent out to subscribers of Private Wealth Advisory regarding the growing threat of inflation in the financial system.

Today we assess how inflation is already impacting the cost of living as well as why the Fed won’t be able to rein it in, no matter what Bernanke says. To learn more about Private Wealth Advisory, CLICK HERE.

As noted in Monday’s essay, the Federal Reserve and world Central Banks, by loosening monetary policy and spending money in order to combat their dreaded debt deflation, have unleashed inflation upon the financial system.

This is happening both blatantly in the form of prices being raised:

Food prices hit record highs in 2011

The price of basic foodstuffs hit a record high in 2011, with the cost of cereals surging by more than a third over the last 12 months, the UN’s Food and Agriculture Organisation said on Thursday.

The FAO said that its monthly Food Price Index averaged 228 points in 2011, the highest level since records began in 1990, although prices did slide by some 2.4 percent in December. The previous high was in 2008 at 200 points.

The Rome-based organisation said that its cereal price index — which includes the cost of rice, wheat and maize — averaged 247 points in 2011, up some 35 percent from 2010 and the highest since the 1970s.

http://www.google.com/hostednews/afp/article/ALeqM5gcfBxJe2n-ZPmGrv2cHMqFcrrZ1g?docId=CNG.d5ee67dd42d5a468e9ea68e927470560.301

McDonald’s 4Q net income jumps 11 pct

Higher costs for ingredients also continue to be an issue, even though costs for some ingredients, like wheat and corn, have leveled off. McDonald’s said it expects costs for most of its commodities in the U.S. to increase 4.5 to 5.5 percent in 2012, in line with 2011’s 4.9 percent increase. Last year, McDonald’s raised menu prices three times, for a total price increase of about 3 percent, in March, May and November.

Chief financial officer Pete Bensen said the company would continue to “strategically take increases to offset some but not all of our higher costs.”

http://seattletimes.nwsource.com/text/2017317381.html

Starbucks raises prices in U.S. Northeast, Sunbelt     

Starbucks Corp (SBUX.O) raised prices by an average of about 1 percent in the U.S. Northeast and Sunbelt on Tuesday, making coffee-drinkers spend more in New York, Boston, Washington, Atlanta, Dallas, Albuquerque and other cities.

Shares of Starbucks, which boosted drink prices in some other U.S. markets in November, retreated to $45.30, down 1.5 percent, after hitting a new high of $47.04 in early trading.

Starbucks expects high costs for things like coffee, milk and fuel to cut into profits this year. Like other restaurant operators ranging from Chipotle Mexican Grill (CMG.N) to McDonald’s Corp (MCD.N), it is raising prices to help offset some of that cost pressure.

http://www.reuters.com/article/2012/01/03/us-starbucks-idUSTRE8021N220120103

The State of the Economy By the Numbers

In Jan 2012 the average national gas price is $3.389 a gallon, an increase of 28 cents compared with $3.11 a gallon a year ago.

Historically this is fairly high for this time of year.

http://abcnews.go.com/blogs/business/2012/01/the-state-of-the-economy-by-the-numbers/

… however, inflation is also entering the financial system in a more stealthy mode as retailers begin to offer less product for the same price.

Indeed, as the below article summarizes, Kellogg’s has reduced 15% of the cereal in its boxes. Snickers has reduced its bars by 11%.  Haagen-Das has reduced content by 12.5%, Heinz Ketchup has reduced content by 11%, etc.

U.S. Companies Shrink Packages as Food Prices Rise

Large food companies have recently announced that they will raise the prices they charge grocery retailers for commodities-based products. For example, a chocolate bar will cost more soon: Hershey last week announced a 10% increase for most of its confectionery goods.

 Of course, straightforward price hikes could cause consumers to buy less of those products or to choose less costly store brands. So in many cases, food companies are trying a different tactic: Keeping the price of an item the same while decreasing the amount of food in the package. The company recoups the costs of the rise in commodities and hopes consumers don’t notice that they’re getting less of the product for the same price.

http://www.dailyfinance.com/2011/04/04/u-s-companies-shrink-packages-as-food-prices-rise/

It’s worth noting that this trend has been in place as far back as 2008:

The incredible shrinking Doritos bag

PepsiCo is not alone in subtly cutting size as a substitute for raising prices. Kellogg (K, news, msgs), General Mills (GIS, news, msgs), Unilever (UL, news, msgs), Wm. Wrigley Jr. (WWY, news, msgs) and Procter & Gamble (PG, news, msgs) have quietly trimmed the amount of cereal, ice cream, chewing gum, paper towels and toilet paper you get. (See the slide show.)

http://articles.moneycentral.msn.com/Investing/CompanyFocus/TheIncredibleShrinkingDoritosBag.aspx

Make no mistake, inflation is creeping into the system in a big way. And the Fed will not raise interest rates to fight it until it’s far too late. Debt levels are simply too high for the Federal Government and US corporations, particularly the large banks which the Fed has been doing everything it can to prop up.

To read the rest of this client letter, see the investments I’ve isolated that will maintain their purchasing power during inflation (they’re not Gold and Silver) and learn more about Private Wealth Advisory can help you outperform the market…

Click Here Now!

Best Regards

Graham Summers