Thursday, May 17, 2007

Worrying inflation outlook

Despite what economists are saying and what investors are hoping for, signs are price inflation is increasing and it will have a significant impact on the markets over the next 6 to 12 months.

Exhibit 1: Metals commodity prices are near or at all time highs. These will filter through to the cost price and eventually retail price of goods.

Exhibit 2: The interim results announced by Astral and the annual results announced by Sovereign Foods show there is a sharp increase in maize prices compared to last year, due to crop shortage caused by a severe draught. This sharp rise in maize prices has already caused food and meat prices to rise sharply.

Exhibit 3: Locally, the energy cost will continue to rise, due to Eskom hiking the electricity prices and the ever rising petrol and diesel prices.

The more I think about the possible consequences on consumer spending, Reserve Bank's interest rate decisions and corporate profits, the more I am nervous about the markets at current levels.

Trade cautiously.

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