The reflation of the financial industry continues. Last week, Citigroup’s CEO Vikram Pandit got his salary restored from the recession-related, punitive $1 level. He is now earning $1.75M per year. Goldman Sachs has joined the reflation and then some. Goldman’s CEO Lloyd C. Blankfein got a 2011 pay package including a 233% pay raise to $2M. Other executives were also granted generous increases in their pay packages. For more details see “Goldman Sachs Gives Blankfein a Big Raise.”
While this revival of largess may never trickle down toward the masses of unemployed and underpaid, it is once again difficult to imagine that deflation is an imminent threat when bankers are being restored to previous glory!
While governments in several emerging markets are rushing to contain inflation pressures, governments in developed economies in Europe and North America are idling in the hopes that external inflation pressures are not bad tidings of things to come. Germany could become a prime example of the mounting pressure between the need to maintain stimulative monetary policy for one part of the economy (the periphery of Europe) even while other parts heat up.
On Wednesday, Bloomberg reported: “German Import-Price Inflation Accelerates to Fastest in More Than 29 Years.” The various statistics on inflation in Germany are eye-popping:
- Import-price inflation accelerated to 12 percent, the highest rate since October 1981, from 10 percent in November
- In the month, prices increased 2.3 percent, almost double the 1.2 percent forecast by economists
- Energy was 34.2 percent more expensive in December than a year earlier
- Iron ore prices soared 98.4 percent
- Non-iron ore metals cost 37.9 percent more
- German consumer-price inflation accelerated to 1.9 percent last month, pushing the euro-area rate to 2.2 percent, the first time it has breached the ECB’s 2 percent limit in more than two years
For those of us who never believed that deflation was a serious threat given the monetary actions of central banks across the globe, we must now wonder how much longer will it take for inflation to start hitting consumers across a broad array of purchased goods.
Hopefully, by now, you have been disabused of the notion that deflation remains a serious and imminent threat for the U.S. (or global) economy. Certainly, Vikram Pandit, Citigroup CEO, knows all about inflation’s positive benefits.
After reporting an incredible $10.6 billion in profits last year, Pandit was rewarded with a 75% pay hike. His base salary went from a mere $1 to a more appealing $1.75M. Pandit froze his salary at $1 in response to the severe recession that almost wiped out the bank before the U.S. government bailed it out.
More details in Bloomberg: “Citigroup Boosts Pandit’s Base Salary to $1.75 Million From $1.” This article also references the bonuses paid out to several other Citigroup executives.
On Thursday, CNBC aired a segment on restaurant stocks, discussing the prospects for profits given rising food costs.
The December statistics from the Labor Department demonstrate the growing pressures on costs for eating establishments. The December PPI was up 1.1%. Food prices were up 0.8% primarily due to a 22.8% price hike in fresh and dry vegetables and an increase of 15.4% in the price of fresh fruits and melons.
Nation’s Restaurant News conducted a survey of restaurant operators that found that food prices will be a big issue in 2011:
- 60% expect to raise menu prices in 2011
- 5% expect to cut prices in 2011
- 39% say higher commodity costs would pose biggest challenge
The guests on the CNBC segment were a bit split on their assessments of the restaurant industry’s prospects for 2011.
Dan Popowics, Fifth Third Asset Management
- Operators will be reluctant to raise prices will look to rent or labor and hedging
- Menu prices are a last resort
Peter Sorrentino, Huntington Asset Advisors
- If operators don’t get squeezed then consumers will get squeezed
- There is not much additional room to maneuver
- Cost-cutting story is not going to work
Either way, the increasing “agflation” around the world looks ready to pinch U.S. consumers, businesses, and/or investors.
2010 brought many happy returns to the Indonesian stock market with gains of 46%. So, Monday’s 4.2% drop capping a 3-day drop of 8.1% is still technically a very minor correction. (The stock market has also essentially stalled out for the past 3 months).
More importantly, observers are citing growing inflation fears for the drop in the Indonesian stock market. The Indonesian Central Bank decided to hold interest rates steady for now, but economists and analysts seem to expect a rate hike program to finally begin after rates stayed at record lows for 17 months. As always, the trick is whether monetary authorities can act swiftly enough to stem the looming tide of inflation in the country. The monetary mentality has to rapidly switch from recovery to constraint.
For more details on this story see “Indonesia Stocks Tumble Most in Two Years on Inflation Concern” in Bloomberg.