Prices decline at a record pace in Japan

Japan’s struggle against deflation became ever more urgent as consumer inflation fell at a record pace last month. From Reuters:

“…The so-called “core-core” consumer price index, which strips out the effect of volatile food and energy costs, fell 1.2 percent last month from a year earlier after a 1.0 percent drop in November, data showed. It was the biggest since drop since the series began in 1970…”

Of course, there is now renewed speculation on yet another stimulus package, currency intervention, and other monetary action. With the national debt almost double GDP, Japan’s options are more limited than ever.

Standard and Poor lowered Japan’s credit rating outlook earlier this week. An actual rating cut may drive interest rates up and further constrain the government’s options. Daniel Fisher describes Japan’s dire debt and economic outlook in Forbes: “The Global Debt Bomb.”

Reuters provides a graphic comparing inflation rates amongst Japan, the Eurozone, and the U.S. Click here.


Phone companies jack up rates for basic phone service

David Lazarus of the L.A. Times:
AT&T customers saw their monthly rate for basic residential phone service jump 22% this month to $16.45. The increase followed a 23% rate hike last year.

And you know what? That’s the good news.

The bad news is that, beginning in January 2011, AT&T and other phone companies will be permitted to jack up basic rates as much as they want — no regulatory limits will apply.

Meanwhile, Verizon raised the price it charges for basic residential service last year to $19.91 monthly from $17.66, Lazarus reports.

Federal Reserves Inches Ever So Slowly Toward A Rate Hike

Given the political firestorm surrounding the confirmation for Federal Reserve Chairman Ben Bernanke, you can be excused from forgetting about the next monetary policy action and statement.

This latest release tempered signs of economic resuscitation with causes for concern. The end result is an expectation for a casual stroll toward a balanced economy:

“Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.”

The Federal Reserve also reminded us that the first of many emergency measures will shut down next week. The last measure will shut down on June 30th (the Term Asset-Backed Securities Loan Facility). These activities will finally set the stage for a rate hike at some point in the future…assuming of course the economy does not experience a relapse. The Federal Reserve also assured markets that rates will remain low for an “extended period.” Now that we know “extended period” means no sooner than six months, we should expect no rate hikes until after the end of all emergency financial measures.

This statement did contain one surprise. One of the voting members objected to the latest policy action:

“Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”

We have witnessed members of the Federal Reserve wonder aloud about the proper time to begin raising rates. However, this is the first time that a member has voted outright against the current fund rate policy. Consider this one more inch toward a rate hike.

TIPS indicate annual inflation expectations above 3% for next 5-10 years

In “Look to TIPS, Not Fed, for Inflation Tips“, the WSJ describes how current trading in Treasury Inflation-Protected Securities (TIPS) indicates inflation expectations running above 3% per year for the next 3-5 years. The WSJ uses the Fed’s “5yr5yr breakeven” method.

Full disclosure: long iShares Barclays TIPS Bond Fund (TIP)

AKS Steel Expects An Increase In Average Selling Price

AK Steel (AKS) fourth quarter and annual earnings this morning. The outlook for the first quarter includes an expected increase in average selling price of 3-4%. This price hike appears consistent with a recent series of price hikes from AKS (as reported here on Inflation Watch).

AKS returned to profitability in the third quarter of last year and expects to remain profitable in this year’s first quarter despite shipments remaining flat with fourth quarter levels.

Full disclosure: author intends to purchase AKS today

Drop in apartment construction may lead to shortages, big rent increases

Apartment rents have been falling. Vacancy rates are high. But how long will that last?  Steve Brown of the Dallas Morning News reports that we may soon be facing a shortage of apartments:

A dramatic decline in U.S. apartment construction could lead to a shortage of rental housing in the years ahead.

This year, developers are expected to start about 87,000 units – less than a third of what they build on average each year. And the outlook for 2011 isn’t much better.

“We will be facing a severe shortage of apartments in the next few years, which will increase the cost of housing for consumers,” Sharon Dworkin Bell, senior staff vice president of the National Association of Home Builders, said at this week’s convention in Las Vegas. “We believe we should have 300,000 starts every year to have a stable market.”

That’s not likely in the foreseeable future.

“We have a combination of limited supply coming on and increased demand when the economy recovers,” Bell said.

Michael Costa, a partner in McFarlane Costa Housing Partners of California, said, “We know that the demand for housing – especially rental housing – is going to be there. Each month we are not able to get our starts going, we fall further and further behind.”

At some point, a lack of rental units will take a bite out of consumers’ pocketbooks. “We are predicting now we may see upwards of double-digit rent increases,” Costa said.

Consequences of the Massachusetts vote

At Seeking Alpha, Bruce Krasting has interesting thoughts about last week’s vote in Massaachusetts. One of his points:

“I read the election result as being dollar positive. Somewhere inside this vote last night is a call for fiscal conservatism. We are going to hear rhetoric to that effect in the coming months and we will see legislative steps that at least give lip service to the idea that we ought to tighten our belt a few notches [emphasis added].”

I agree with Krasting that we will hear a lot more rhetoric about fiscal conservatism. I also agree that we will see legislative steps that give lip service to the idea of cutting spending.

However, I doubt any measures will emerge from Congress that go beyond rhetoric and lip service.

There are a couple of ways to look at the results from Massachusetts. The consensus view seems to be that voters there are fed up with Big Government approaches to policy problems. There is probably some truth in this, but I don’t know if that was the overriding factor. Consider:

1) Massachusetts already has universal health coverage and there is no effort there to repeal it.  Sen.-elect Scott Brown voted for this program and apparently has no regrets.

2) Nationwide, many elderly people oppose President Obama on health care reform because they don’t want Medicare cuts and they don’t want rationing of care (“death panels”).  They want Medicare to cover pretty much everything, regardless of cost-effectiveness (or lack thereof).  These voters are not calling out for limited government, but rather they support the status quo.

The real lesson of Massachusetts, I think, is that Medicare cuts and rationing based on cost-effectiveness analysis are extremely unpopular.

Pander Bear, ready to report for duty

I expect policymakers and politicians in both parties — from Fed officials to Congress to the President — to become even bigger Pander Bears than they already are (if that is possible). There will be plenty of rhetoric and lip service about the need to be fiscally responsible — that’s for sure — but  please don’t expect any real  spending cuts to materialize.

Eventually there comes a point when the lack of spending restraint will be inflationary. How long it will take to reach that point, nobody knows.

Update: The U.S. isn’t the only country with out-of-control finances.

“Stealth inflation”

At Davian Letter, Barbarian Capital discusses “stealth inflation”–“price increases that are not likely to be captured by the official stats because they are household-specific and, yet, take money out of your pocket.” An example:

While your [health insurance] premiums certainly went up, did your co-pays and deductible also go up? Mine did. There are also reductions in lifetime maximums for certain conditions, as well as complete elimination of coverage for other conditions. These changes most certainly mean that you buy less healthcare coverage for your dollar, but they cannot be quantified within a basket of goods.

Orange County, Calif., rents fall 6.7% to mid-2006 level


The average rent for a unit in a large Orange County apartment complex fell to $1,473 a month in the fourth quarter of 2009, the fifth straight quarter to see monthly rents drop.

Apartment tracker RealFacts reports today that numerous empty apartments forced local landlords to cut rent $105 a month on average — 6.7% — vs. the fourth quarter of 2008. And it’s the lowest average rent in 3 1/2 years.

We at Inflation Watch are well aware of rising prices for health insurance, college tuition, food, and many other items. But as long as apartment rents continue to fall, inflation (as measured by the Consumer Price Index) will probably remain quite tame.

U.K. December CPI Hotter Than Expected

The Bank of England made it clear last year that it expected higher inflation rates in early 2010 given the increase in the VAT. However, with December’s CPI and core CPI both coming in hotter than expected – respectively, 2.9% vs 2.6% and 2.8% vs 2.3% – speculation is swirling about the BoE’s response. Bloomberg cites economists and analysts claiming that inflation may increase further and that rate hikes may start as early as May this year. (See “U.K. Inflation Rate Jumps Most on Record on Oil, Tax“)

The pound even spiked against the U.S. dollar on the CPI news before quickly selling off.

World Economic Forum Still Rates A Collapse In Asset Prices As Its Highest Risk

The World Economic Forum has released its latest report “Global Risks 2010: A Global Risk Network Report.” The WEF still rates a collapse in asset prices as its highest risk to the global economy. Specifically, the report assigns a greater than 20% chance of an asset price collapse costing over $1 trillion (graphic on page 3). If central bankers around the world believe this assessment, they are very likely to keep interest rates low for some time to come!

The 2010 report did not focus on asset prices since it was covered in depth in the 2008 report. Here is what the 2010 report has to say:

“The last edition of this report discussed the longer term implications of the financial crisis, exploring the tight interconnections among economic and resource related risks. The fact that the risk of an asset price collapse remains the strongest risk on the landscape on the severity and likelihood axes illustrates the continuing uncertainty about the resilience of the global economy and the effectiveness of fiscal and monetary responses, governance and regulation. Concerns abound about the decline in the dollar and low interest rates fuelling another bubble, this time liquidity rather than debt-driven. Experts are also worried about a lag in the impact of the recession in a number of areas. The level of corporate bankruptcies, particularly among small and medium size enterprises remains high. Credit card default rates, which are highly correlated with unemployment, are already at historic levels. The current unemployment rate of more than 10% in the US is considerably higher than the 6.5% unemployment rate that most credit card lending models assume. Finally, though residential house prices have fallen considerably in those markets considered to have been the most overheated, concerns persist about commercial real estate. As
illustrated by the events in Dubai in December 2009, debt loads remain high; as refinancing needs arise, which are only expected to peak between 2011 and 2013, further shocks could emerge.”

Cell phone, cell phone plan prices are dropping

Here at Inflation Watch, we spend most of our time talking about rising prices, but there are some sectors of the economy in which prices are falling. Historically, one of those sectors has been technology (e.g. computers).  Thus, it is not surprising that cell phones and cell phone plans are becoming more affordable.  Wal-Mart now offers a plan with unlimited minutes for just $45 per month. Larger carriers are lowering their prices.

This device is not a phone, but offers free e-mail service for life for less than $300. This is a pretty amazing deal, especially if (like me) you prefer e-mail to talking on the phone.

24/7 Wall Street says cell phone prices may drop much further:

Imagine if Google wanted the mobile web ad market so much that it just gave the phones away for ad-maximization.  Or imagine if things got so tight that Steve Jobs started giving away iPhones for free, if you buy a Mac.  Those are far from likely, but something in the middle might not be.  That is why they call price wars a race to zero.

Candy prices rising on increased cost of sugar

With sugar prices at 29-year highs, candy makers are hiking their prices, the Chicago Tribune reports:

Many candy-makers instituted price increases of about 10 percent last year, said Sal Ferrara II, president of Forest Park-based Ferrara Pan Candy Co., maker of such venerable brands as Lemonhead and Red Hots….

Meanwhile, data from market researcher Nielsen Co. show that the price of non-chocolate candy jumped almost 9 percent during the 13 weeks ended Nov. 28 compared with the same time last year. Chocolate candy has experienced a similar price jump. Makers have been hit by high sugar costs and soaring cocoa prices.

FedEx to raise its freight prices by 5.9 percent


FedEx says it will raise prices at its freight and national trucking unit by 5.9 percent on Feb. 1.

These rate increases apply to the company’s less-than-truckload shipments, where a number of smaller loads from a variety of shippers are consolidated on a single truck for final delivery.

Wage drop is steepest since 1990; whither the American consumer?

AP reports that  the spending power of American families is being squeezed:

Workers saw their inflation-adjusted weekly wages fall 1.6 percent last year – the sharpest drop since 1990 – even as consumer prices rose only modestly.

No one can accuse Inflation Watch of being complacent about inflation. However, as long as wages continue to stagnate, it seems fairly obvious that inflation on the whole will remain subdued.

The news about declining wages comes even as we’re seeing ample evidence of rising prices for some consumer staples (e.g., food, gas, health insurance, parking, cars, utilities).  In short, U.S. consumers are paying more and earning less.

In the good ol’ days, consumers could sustain their standard of living by simply borrowing more. But credit card companies have been cutting credit limits and home equity loans are no longer available to many homeowners.

In short, the lending spigot has been turned off.

It’s really hard to see how spending by the American consumer is going to hold up if this scenario continues.

Starbucks increases prices of some drinks

CNN/Money: “Starbucks is raising prices on certain drinks by as much as 35 cents in large U.S. markets and in Canada as part of what the coffee chain calls its “normal course of business… The move could be a risky one for Starbucks, which has suffered declining sales for two years as consumers switched to lower priced brands like McDonald’s and Dunkin Donuts.”

Chinese property prices increased 7.8% in December

Times Online is reporting that property prices in China rose 7.8% year-over-year in December – the fastest pace since 2008:

“Property prices across China’s 70 largest cities surged at their fastest pace since 2008 in December, stoking rising anxiety in Beijing that a speculative bubble may be forming and that Chinese banks may have issued more than £70 billion in new bank loans since January 1.

Residential and commercial property rose an average 7.8 per cent from a year earlier in December, according to data from the National Development and Reform Commission – far higher than the 5.7 per cent year-on-year rise in November and a number that disguises the more rabid clip of property price inflation in cities like Shanghai and Beijing.”

Corn prices plunge “limit down”

After reporting on prices at multi-decade highs for foodstuffs like tea, cocoa, and sugar and soaring prices for oranges due to the Florida freeze, we finally have a food commodity plunging in price. Today, corn prices plunged 7.1% a bushel (30 cents) which is “limit down”, meaning the maximum allowed price drop on the exchange. The catalyst was the United States Department of Agriculture (USDA) reporting record corn production:

“U.S. feed grain ending stocks for 2009/10 are raised based on higher estimated corn and sorghum production. Corn production is estimated at a record 13.2 billion bushels, up 230 million bushels with higher area and yields. Corn feed and residual is projected
150 million bushels higher based on September-November
disappearance as indicated by the December 1 stocks. Partly offsetting is a 10-million-bushel reduction in food, seed, and industrial use reflecting lower-than-expected September-November shipments of high fructose corn syrup. Corn ending stocks are projected at 1,764 million bushels, up 89 million bushels and the largest since 2005/06. However, because of higher usage, stocks as a percentage of use are down year-to-year at 13.5 percent compared with 13.9 percent for 2008/09.”

In related news, soybeans set another production record while the wheat crop is likely the smallest since 1991.”

RockTenn increases the price of uncoated recycled paperboard

RockTenn (RKT), a manufacturer of paperboard, containerboard and consumer and corrugated packaging, announced today a $50/ton price increase on uncoated recycled paperboard. This price hike takes effect early next month.

Price of personal computers to rise for first time in six years

Financial Times reporter Robin Kwong says that PC prices will increase this year due to shortages of semiconductors and other components:

The cost of assembling personal computers will rise this year for the first time in six years because of shortages in some key components, industry analysts have forecast.

The cost of semiconductor components in computers has fallen by an average of 7.8 per cent a year since 2000, but is set to rise 2.8 per cent this year, according to data from Gartner, the research consultancy.

This is almost entirely attributable to a 23 per cent increase in the price of D-Ram memory chips . Those chips, which are needed in every computer, make up about 10 per cent of a PC’s overall cost.

“In general, there is a steady drop in the cost of a PC every year. If component prices are flat or even increasing, that means they are outperforming expectations,” said Ben Lee, principal research analyst.

The cost of flat-screen monitors was expected to increase by about 20 per cent this year because of shortages, Mr Lee said.

Other components in short supply include hard drives and optical disc drives.

The shortages are part of the aftermath of the financial crisis, which led many manufacturers of technological components to delay investment plans.