Agflation !

Over the years, we’ve looked at — and coined one or two — terms for the current inflationary environment. We have reviewed such phrases as:

Stagflation: The classic 1970s term for high inflation (+6%), very anemic growth (0-2%)

Blahflation: Street Insight’s Doug Kass term circa 2006 (video)

Stagflation Lite: was what NYU’s Nouriel Roubini called it in June 2006;

Demi-Stagflation: My own term for elevated inflation and soft growth (May 2005)

Inflastagdeflation: Minyan Keven Depew’s term for understated Inflation, stagnant wages and incomes, and price cuts in markets that are either highly competitive or experiencing weak demand.

To this list of clever wordsmithing, we add one more phrase, courtesy of Raymond James Chief Strategist, Jeff Saut.

That word is Agflation:

"These inflationary leanings were reflected in last week’s headline CPI figures (+0.7% in May), which were the second highest in 16 years, that is still not being reflected in the laughable “core figures” (+0.1%), begging the question, “Can this particular ‘conundrum’ continue?!” 

Again, commonsense says NO, since the 25% increase in the Goldman Sachs Commodity Index over the past five months suggests that eventually commodity prices will bleed into the core readings.

This “agflation” has left grain prices at 10-year highs, stoking inflation fears in Europe and putting central bankers there on alert. Also adding to the agflation-agitations has been worldwide drought conditions, a fact that has not been lost on China, where foodstuff consumption accounts for a large portion of disposable income. Consequently, China has raised interest rates substantially over the last 12 months. Even Japan may have to join the international rate-rape since Japan’s 1Q07 GDP was revised recently to +3.3%, from 2.6%, implying that growth there is stronger than both here and Europe. If Japan raises rates, it would have wide ranging implications for the ubiquitous “carry trade” that drove usage of currency and stock derivatives up 24% in the first quarter of this year to an astounding $533 trillion, but that is a discussion for another time." (emphasis added)

As we noted this past weekend, the prices for commmodities in general, and agricultural commodities in particular, had reached all sorts of highs: Wheat prices hit 11-year high; Oil Rises to Nine-Month High; Copper Gained; Gold, Silver Rise; Corn, Soybeans Rise; Cotton Extends Rally to Three-Year High; Cost of Gas and Food Rose Sharply Last Month;   

The absurd list of what doesn’t go into "core" inflation is long, and ever more ridiculously, getting longer: Wheat, Oil, Copper, Gasoline, Gold, Silver, Corn, Soybeans, and Cotton. 

Oh, and education and medical care never seems to have much impact, regardless of the extraordinary price gains they have seen over the previous decade — the past 5 years in particular.

Then there is the actual cost of Housing, not properly reflected in the BLS Consumer Price Index (CPI).

But other than all these items going up in price, there is no inflation.


UPDATE: June 22, 2007 8:17am

Steve sends in this April 27, 2007 report from Merrill Lynch’s Richard Bernstein and Jose Rasco, titled "Global Agriculture & Agflation"

Food prices are rising, putting upward pressure on producer and consumer inflation.  Agflation has begun.  Given the expanding constraints on food supply, the changing demand for food, and the entrance of the energy business as mass consumers of food products it is not surprising to see food prices rapidly putting upward pressure on overall inflation.

This can be good news for the food companies who are attempting to pass along those higher food input prices to the consumer.  They are maintaining or expanding margins and they are hopeful that the constraints on food supply and the changing and expanding global demand for food products will continue to put upward pressure on prices.

Unless someone comes up with an earlier use of the phrase Agflation, Imay have to give authorship credit to Bernstein and Rasco. (Sorry, Jeff).


Jeffrey Saut
Investment Strategy
Raymond James, June 18, 2007


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What's been said:

Discussions found on the web:
  1. Kevin in Boston commented on Jun 21

    Isn’t there an agricultural commodity index ETF that can be used to play this ag inflationary trend? Anyone know what it’s called, or think it’s a good idea (or if it’s bad timing now..)?

  2. Strasser commented on Jun 21


    You might take a look at DBC with commodity weighting in oil, al, gold, corn and wheat. Hope this helps.

  3. Old Ari commented on Jun 21

    And hedonic adjustments

  4. Prentiss commented on Jun 21

    Why is it that the impact of medical care and educational inflation that most everyone bemoans doesn’t seem to show up in the CPI numbers? Is it a problem with the rates of increase reported for those respective categories or is it the relative weightings they receive? I find it hard to believe that “Tuition, other school fees, and childcare” can be weighted at 2.872% while “Telephone services” can be weighted at 2.225%. I have a hard time believing that ones telephone bills are just slightly less costly than all education and childcare costs.

  5. Stuart commented on Jun 21

    Outrageous. Mainstreet screwed again.

    Paulson Pushed on Shareholder Suit Issue

    Thursday June 21, 2007 12:01 AM

    AP Photo DCMC106, DCMC104


    Associated Press Writer

    WASHINGTON (AP) – Treasury Secretary Henry Paulson said Wednesday he personally initiated his department’s role in a Supreme Court case that could hurt shareholders’ efforts to recover losses in securities fraud lawsuits.

    Paulson’s acknowledgment came at a House Financial Services Committee hearing where Rep. Maxine Waters, D-Calif., focused on the plight of investors who lost billions in the collapse of Enron, a Texas energy firm whose executives were convicted of fraud.

    At Paulson’s request, Treasury this month cautioned the Justice Department’s solicitor general about enabling investors to sue firms that do business with scandal-ridden companies.

    The issue arose because of a shareholder suit before the Supreme Court that seeks to recover money in a securities fraud case against two suppliers to a cable TV company. The outcome likely will determine whether a similar lawsuit by Enron investors against Wall Street investment banks is allowed to proceed.

    The Securities and Exchange Commission urged the solicitor general to file a brief in support of investors.

    But President Bush, Treasury, the Federal Reserve and the Office of the Comptroller of the Currency weighed in on the opposite side of the issue, which is referred to as third-party liability.

    The solicitor general, who represents the Bush administration’s views in the Supreme Court, decided not to side with investors. In several weeks, the solicitor general’s office will decide whether to file a brief in support of defendants in the case.

    “I am very surprised to find out that our government, this administration and you have decided that you are more interested in protecting those with third-party liability as it relates to Enron than you are in protecting the citizens who got ripped off,” Waters told Paulson.

    “I am a very strong advocate of protections against security fraud,” Paulson replied. “I asked the Treasury Department to send a letter to the solicitor general” on the separate case before the Supreme Court because “I thought it had enormous implications for the U.S. economy.”

    Paulson said supporting such lawsuits “could create a very uncertain legal environment that is ultimately harmful to our economy and to the workers.”

    “The relevance to Enron can’t be lost,” said Waters.

    Paulson said his concern was exposing firms to liability that “happen to do business” with a company allegedly engaging in securities fraud.

    The Treasury letter says that allowing such lawsuits creates uncertainty and “could adversely affect domestic and international competitiveness of the U.S. financial markets.”,,-6724229,00.html

  6. alexd commented on Jun 21


    Perhaps the next time Larry Kudlow goes on a rant about lowering taxes, and how we have low inflation, he should consider the points you have brought up. Is the real wealth of the middle and lower classes in the USA, in terms of overall purchasing power going up or down? I am leaving out the rich from this little idea due to the idea that it throws the curve. That is if you take me and all other people in my economic class you get a more moderated average than if you throw me and Bill Gates in that same room and take the average.

    Or we can do the Big Mac index how many Big Macs in France (remember that line in Pulp Fiction?) could we buy 5/10 years ago for x$ versus today? I tell a freidnd I know that I use the Tinm Horton Index. Five years ago when I visited Canada and went to a Tim Horton’s Doughnut shop for about 135 US I got a coffee and a doughnut. Now for the same I get just the coffee.

    I just feel there is a lot of self deception going on today. Of course any self deception on my part is unknown to me…

    Be well.

  7. To The Hilt commented on Jun 21

    Question from an English major (go easy on me if I say something economically ignorant):

    I’ve been reading this blog for a couple of weeks now, and I have noticed that the favorite theme, at least recently, is that it is silly not to include food and energy when discussing inflation. I would tend to agree, as these items make up a large portion of the cost of being alive.

    My question, then, is what can be done to combat inflation-proper (however you would choose to define that)?

    Perhaps the reason so much attention is paid to core inflation is because that is the only figure over which the Fed has any power? It seems to me that raising interest rates would have little effect on the price of corn, grain and oil.

    I haven’t taken an economics class since high-school. My interest is purely amateur (although I do work in finance) and largely uninformed, so any light anybody could shed on this topic would be greatly appreciated.

    Thanks in advance.

  8. Karl smith commented on Jun 21

    Actually, To The Hilt you have it laregly correct.

    The guys harping on headline inflation seem to be living in a parallel world where the only the the FED cares about is “feeling their pain”

    The FED looks at inflation data not to surmise whether or not people are facing higher costs but whether the money supply is growing too fast.

    If there are drought like conditions, if governments are imposing stricter environmental regulations and if the world’s already tight oil supply is put in jeapordy those are REAL COSTS, not NOMINAL COSTS.

    In other words your labor buys less grain because there is less grain per hour worked. Not because wage inflation is failing to keep up with price inflation.

  9. michael schumacher commented on Jun 21

    Fun with economic numbers:

    Yet another revision

    “The Conference Board said its index of leading economic indicators rose 0.3 percent, higher than the 0.2 percent analysts were expecting. The increase reversed a revised 0.3 percent drop in April, down from the original 0.5 percent decline that economists blamed on soaring gas prices and a drop in building permits.”

    Such bullshit…why even release them that way in the first place when you know it’s always going to be revised to suit this administrations agenda.

    I wonder what data the Fed looks at (they say they do) the original or the revisions???

    My guess is the latter if at all..


  10. RW commented on Jun 21

    Kevin in Boston: You’re probably thinking of DBA — corn, wheat, soybeans and sugar — big run-up recently as you might expect but also very volatile; see for a copy of the latest 10-Q.

    Disclosure: I own shares in the fund.

  11. Estragon commented on Jun 21

    To the hilt:

    The fed only has real power over one “price”, and it really isn’t a price at all. It controls the risk free price of a specific unit of time (overnight) in US dollars. That price (and credibly expressed future intentions for that price) influences, but doesn’t control, the price of time throughout the term structure of credit markets. The price of time in turn influences, but doesn’t control, decisions on the allocation of credit and real resources.

    The notion that headline inflation is irrelevant because the prices of food and/or energy are beyond the fed’s control doesn’t make sense. The fed doesn’t control any of the prices in the CPI. All of them are subject to supply/demand dynamics irrespective of the price of overnight money.

    The argument for excluding food and energy is that they’re volatile and short term fluctuations may be misleading. There’s validity to that argument, but there are better ways of dealing with short term fluctuations than to ignore certain prices entirely.

  12. Steve commented on Jun 21

    Go read Karl Smith’s post in the comments section of this post here. He does a good job of explaining why the core rate is important.

  13. Steve commented on Jun 21

    Oops…that last post was directed to To the Hilt, in response to his questions.

  14. Fred commented on Jun 21


    I would be very interested in your read of today’s Hays Advisory piece titled, “Why Isn’t Anyone Talking About the T-Bill?”

    They illustrate a 97-99% correlation between the Fed Funds Rate and the 90 day T-Bill.

    Perhaps all the subprime/housing issues are being baked into the picture…and it reads a cut in (short term) rates.

    Again, I’d love your take on this.

  15. BDG123 commented on Jun 21

    First it is China’s billions who make an average of $1 a day are going to buy all of these American products. What, I don’t know, because we don’t make anything they want. If we did, our trade imbalance wouldn’t be what it is. Then it was capex picking up even though it has been in a ditch for a decade. Then it is that the spread on 2-10s is telling you a pickup in economic activity is taking place. Now, you are saying a correlation exists in the 90 and FFR and it is telling you a rate cut is coming. Psst, what about the FF Futures? Which position of yours is accurate? Which do you stand by?

    The economy and capex and China are great so the Fed is going to cut? Let me pose a simple question to you. Please answer it in some type of detail that has a plausible explanation behind it. I’m ready to be educated. If we have ample liquidity and the U.S. has shown weak economic data sans consumption for seven years, what is a rate cut and more liquidity going to do to help the economy? Ask your buddy Don Hays. It appears his tune of the month has no consistency if your commentary is a reflection of his position. How should I take that other than a lack of understanding of what is transpiring? I humbly await your thesis.

  16. Goldilocks commented on Jun 21

    More alignment of conspiracy theorists with the perma-bears.

    Strange company you bears choose to keep.

  17. Fred commented on Jun 21

    It’s not a thesis…it’s a factual, historical correlation (97-99%).

    The “market” of the 90 day bills has “forced” these rates down to a point where the Fed will have no choice but to cut rates (in theory) when they trade > 10% below the Fed’s Target Rate for a few weeks. The Fed has been (smartly so) jawboning the risks of inflation. By not “following” the T-Bill rates the Fed has in fact become tighter, or more restrictive. The correlation suggests that the Fed will have to “catch up” with the market.

    While I don’t want to debate definitions of “inflation” that have been smartly questioned here, a guess that the inflation numbers will be falling in the near future is a good bet. All the inventory of unsold condos will be competing for rental income, and dropping the OER (owner equivalent rent) which is a big component of the inflation numbers.

    Thanks for the (mostly) civil question.

  18. BDG123 commented on Jun 21

    In other words, you cannot defend your prior or existing positions. You deflect my questions by trying to change the topic. I could care less about 90 day and FF rate correlations. I didn’t ask and don’t care about your short term analysis of FF and 90s. Might someone even explain how they wouldn’t be correlated? It’s moot. You obviously can’t explain your macro theses nor can you defend them. That’s no big deal and I wouldn’t typically call anyone out for that fact. But for the fact that you have an awfully large set of lungs and alot of intimations that those who are concerned about significant risk are wrong. That’s quite characteristic of someone unable to defend the plausibility of his constant chatterings.

  19. Fred commented on Jun 21

    WTF?? lol

    I should have known better than to repond to your bloviation.

    Go back to sleep.

  20. michael schumacher commented on Jun 21

    ^^^^ D’oh

    Fred also beleived that the tax issue in florida would “save the real estate market” there as well.

    That WHOPPING $174 per year is really going to save the entire florida market.

    And yea…I’ve heard nothing back from him on that as well.

    It seems that Fred does just enough reading to appear educated about this and other issues. When asked or pressed for support he (along with the other perma bulls) ask you where your money is or how big you’re wallet is.

    Gotta love that…


  21. Estragon commented on Jun 21

    Fred & BDG123:

    A correlation may be interesting, but it isn’t causality. IF there’s causality, I suspect it runs more like “97% of the time, the market correctly predicts the near term path of FF rates to within X basis points”. That FF rates are higher than 90 money may relate more to expectations on the part of foreigners for a USD bounce in the short versus longer terms than to expectations for a FF rate change, for example.

  22. BDG123 commented on Jun 21

    I really liked that last response. Like the fact that I wondered why he didn’t actually attempt to answer my first question was some wild, absurd response on my part.

    I wouldn’t pick on Fred if he weren’t so full of himself.

  23. michael schumacher commented on Jun 21

    right about now I expect Nogo law to swoop down in his defense with this hard hitting question:

    “so where is your money?”

    As if that has ANY relevance to this question and/or blog.

    Or just point to the index(s) and say “see I told you”

    Day is not over yet though…


  24. Fred commented on Jun 21


    There have been many examples in the past (easily seen on the graph) where the market lead the Fed. This may well be another example…or it could a “3% aberration”.

  25. To The Hilt commented on Jun 21

    Steve, Karl, thanks.

    Estragon, I was not arguing in favor of excluding Food and Energy in measuring inflation, nor am I taking the stance that inflation is low.

    If you consult my first post, you’ll see I asked what could be done to reduce inflation INCLUDING food and energy. You hinted that there might be an answer to that question but did not provide an answer.

    If there is no effective way to control the prices of food and energy, and if the price increases are not in fact short term fluctuations but rather systemic changes in the supply/demand dynamics (Peak Oil or Food vs. Fuel), then what is the point of including those prices in a discussion of inflation?

    As I see it, there is inflation with respect to food and energy, but what can be done about it?

  26. Steve commented on Jun 21

    To The Hilt,

    It’s a good question. Inflation is high, but what are we supposed to do about it? I guess you could reduce demand for energy and food by inducing a recession, but that doesn’t sound like an effective way to deal with it. Between the two undesirable scenarios of paying a lot for food and energy or being unemployed, I imagine most would prefer the high prices.

    Also, as soon as the demand recovers from the recession, high prices would return.

  27. Steve commented on Jun 21

    On your blog you attributed the term “Agflation” to Jeff Saut; the first time I heard the term it was coined by Rich Bernstein of Merrill Lynch, back in April. He released a report on it April 27, one of his global thematic reports. Who knows, maybe some clever wag came up with the term even before that.

  28. Jorge commented on Jan 2

    Martín Redrado, governor of Argentina’s Central Bank, used the term in his recent presentation of the 2008 monetary program to the Congress. He might be reading… (or perhaps it was via ML’s report).

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