The Hershey Company announced a comprehensive increase in prices today “across the majority of its U.S., Puerto Rico and export portfolio” in response to a broad-based increase in the company’s input costs:
“A weighted average price increase of approximately 9.7 percent across the Company’s instant consumable, multi-pack, packaged candy and grocery lines is effective today. These changes will help offset part of the significant increases in Hershey’s input costs, including raw materials, packaging, fuel, utilities and transportation.”
HSY expects these price hikes to benefit the company’s financial results in its 2012 reporting year.
When the nation’s low-cost leader in retail warns about rising prices, people listen. Late last night, USA Today interviewed Wal-Mart (WMT) CEO Bill Simon in an article titled “Wal-Mart CEO Bill Simon expects inflation.” Nothing in the article comes as a surprise to those of us paying attention to inflation but having Simon issue this warning gives a lot more credence to the assessment that inflation, and inflation expectations, are slowly but surely coming unhinged.
The article includes a video in which Simon notes that inflation is “starting to creep into the business.” He started seeing inflation pressures late last year in items like dairy and is now seeing it in transportation-related goods like paper. (I assume he meant goods that carry heavy transportation costs). The article also features some cautionary commentary from a retail analyst.
Key quote from Simon in the article:
“…Inflation is ‘going to be serious…We’re seeing cost increases starting to come through at a pretty rapid rate.'”
NPR blog is hosting an informal poll on inflation expectations here: “Wal-Mart CEO Sees Inflation Ahead; Do You?”
In “Amber Waves to Ivory Bolls“, the NY Times describes the general rush of farmers to plant fields of cotton in the U.S., Brazil, and other countries to take advantage of the high prices of cotton despite the high prices of other food crops. This wave could place further upward pressure on the prices of food as clothing makers win the battle for acreage.
The NYT includes a particularly poignant quote from Webb Wallace, executive director of the Cotton and Grain Producers of the Lower Rio Grande Valley:
“It’s good for the farmer, but from a humanitarian perspective it’s kind of scary…Those people in poor countries that have a hard time affording food, they’re going to be even less able to afford it now.”
It could be another year of discontent for those people whose budgets are largely consumed by the costs of food.
Charles Evans, President of the Chicago Federal Reserve, recently spoke at The Darla Moore School of Business giving “A Perspective on the Current Economy.” The press summarized the lecture by indicating Evans remains a “dove” on inflation:
“The Fed is more sanguine about inflation than some because an outbreak of higher prices is missing a key ingredient – higher wages, Evans said…A weak labor market will continue to exert important downward influences on inflationary pressures, he said.” (from Marketwatch)
A cynical person could say that Evans does not fear inflation because QE2 has failed to provide the one single thing that Americans care most about in the economy right now: jobs. Instead, I will note that this commentary comes immediately on the heels of an op-ed piece from Laurence H. Meyer, a former governor of the Federal Reserve, who opined that inflation is not a problem…and even if it became one, the Fed would quickly get it back under control. Since the Federal Reserve cares more about inflation expectations than current levels of inflation, it makes a lot of sense that a good amount of energy is spent trying to convince people that no matter what the data say or the anecdotal evidence (or Inflation Watch postings for that matter!), the future is fine.
However, the Wall Street Journal noted that the commentary from Evans runs directly counter to the warnings of coming inflationary pressures from FOMC voting member Charles Plosser, president of the Philadelphia Federal Reserve Bank (see here). Apparently, the gameplan and script are not receiving the same reading on the team!
The NY Times printed a mostly anecdotal article about companies hiding price increases in smaller packages in “Food Inflation Kept Hidden in Smaller Bags” (reprinted by CNBC). The article chronicles one shopper’s slow awakening to the shrinking packages all around her as she tries to stretch the family budget to keep the same food on the table. Examples of shrinking products include a can of Chicken of the Sea albacore tuna, Doritos, Tostitos, Fritos, “fresh stack” packages of Nabisco Premium saltines and Honey Maid graham crackers, Procter & Gamble “Future Friendly” products, and the unwrapped Reese’s Minis.
We have printed similar stories of companies using shrunken packages as a method for passing on stealth price increases (see category “Disguised Inflation“):
- November 28, 2009: “Food packages are shrinking, but prices remain the same“
- January 25, 2010: “Stealth inflation“
- November 11, 2010: “Inflation hidden in higher unit costs“
In “Philips Warns On TV Business As Price Pressures Remain“, the Wall Street Journal reports that Philips (PHG) observed a 15% decline in television prices form the fourth quarter of last year to the first quarter of this year. PHG is under pressure to turn a profit in televisions as the company has lost money in this division for several years.
The troubles at PHG confirm the poor performance retailers like Best Buy (BBY) saw in televisions. From BBY’s last earnings report (March 24, 2011):
“The Domestic segment experienced a low double-digit decline in entertainment hardware and software, as well as TVs, as current consumer demand in new television technologies had not yet emerged as a significant revenue driver…”
Reuters reports that Proctor & Gamble Company (PG) and Unliever (UL) are hiking the price of soap and detergent in China by 15% (see here). This action has apparently attracted the attention of government authorities who have promised to “investigate.”
It had to happen eventually. My company recently announced that prices in the company cafeteria are increasing 4-5% in early April. No across the board wage increases have yet been announced though… 🙂
Laurence H. Meyer, a former governor of the Federal Reserve, wrote an op-ed in the New York Times titled “Inflated Worries” in which he confidently argues that inflation expectations remain well-contained and even if they became unhinged, the Federal Reserve is ready to respond quickly:
“The Fed, this argument goes, just won’t be able to act quickly enough to turn off the spigot when the time comes to do so.
But the Fed can raise interest rates directly any time it wants. In addition, it could start to sell the huge volume of Treasury securities and other financial assets on its books, which would also place upward pressure on rates.
Would the Fed act in time? I expect that it will. And even if it doesn’t act in time, and inflation expectations start to get out of line, I am confident that the Fed would tighten monetary policy quickly and aggressively enough to restore price stability and maintain its credibility on inflation. You can take that to the bank.”
Meyer’s unspoken assumption in this piece is that unemployment would not be so high that it discourages the Federal Reserve from acting. Ben Bernanke has made it abundantly clear that unemployment is front and center and that the growing concerns about inflation around the globe are not his or America’s concern. So, I remain extremely doubtful that the Federal Reserve is unconditionally prepared to act in the face of rising inflation expectations.
Meyer also explains in his piece the difference between core and non-core (or headline inflation). He disabuses the audience of the notion that higher food and energy prices increase inflation expectations citing Federal Reserve research that “…unequivocally tell us that core inflation better predicts overall inflation tomorrow” (see “Estimating the common trend rate of inflation for consumer prices and consumer prices excluding food and energy prices“). However, Meyer blithely ignores the study’s conclusion that this relationship did NOT hold during the 1970s and 1980s: “In the 1970s and early 1980s, movements in overall prices and prices excluding food and energy prices both contained information about the trend.” In other words, there is little in this study to suggest that the relationships are stable.
Ultimately, I think those who argue that there are fundamental, structural pressures that indicate increasing energy and food prices are reflective of inflation’s future direction, especially once supply constraints finally show up in more sectors of the economy, will prove to be the most prepared for the future. In other words, today’s food and energy inflation has been an early outcome of easy money policies because supply constraints and demand dynamics are most readily exploited in these sectors of the global economy right now. (I made a related argument when discussing the recent rapid increase in coffee prices).
Hopefully through inflation watch you have been able to note the growing pockets of inflation pressure and the increasing power companies have to raise prices at least at the producer level…
The Swiss National Bank (SNB) has been extremely reluctant to increase interest rates, presumably because its currency has been excessively strong. Meanwhile, its forecast for near-term inflation has increased, and the economy has performed reasonably well despite the strong currency (although tourism and exports have recently suffered a bit).
The pressure to increase rates may have ratcheted up a notch with Anne Heritier Lachat, the chairwoman of the Swiss Financial Market Supervisory Authority (FINMA), complaining about the potential for housing bubbles in Switzerland. Lachat cited in an interview that all the key ingredients for a bubble exist: low rates, demand exceeding supply, and the assumption that housing has once again become a safe investment. The direction of SNB monetary policy could get a lot more exciting from here…
General Mills (GIS) announced earnings this morning and reported that it expects supply chain costs to increase more than expected:
“As we look forward to fiscal 2012, we currently anticipate that supply chain inflation will be higher than this year’s estimated 4 to 5 percent rate.”
The company goes on to state that it still expects good business growth, but it did not provide an assessment of how these costs will impact the bottom line.
The Institute for Fiscal Studies (IFS) released a study on March 21 noting that the recession and recovery period in the United Kingdom from 2008-2011 marked “…the first time that incomes have fallen over a three-year period since the three years from 1990 to 1993, and the biggest three year drop in real living standards since 1980-83.” Real household incomes fell a total of 1.6% over this time whereas in “normal” periods the typical UK household experiences an average income gain of 1.6% per year.
Inflation racing ahead of wage gains was cited as one of the most important factor contributing to this historic decline. Lower interest rates for savings had a large impact on the standard of living for retirees.
Deflation on earning power and inflation in the cost of household purchases has placed a double squeeze on UK residents. In this context it is interesting to note Bank of England governor Mervyn King lamentations during last month’s conference call to defended monetary policy in the latest Inflation Report. King partially defended the on-going accomodative monetary policy in the face of inflation stubbornly above the inflation target of 2%. King asserted that the recession was going to reduce the standard of living either through deflation of wages (impact from the economy) or the increased prices of purchased goods (impact from monetary policy). In his view, this adjustment appears inevitable. However, this recent study by the IFS seems to suggest that in trying to choose the “least bad” option, the UK may end up stuck swallowing both bad options.
While Federal Reserve Chairman Ben Bernanke comfortably dismisses rising food prices as a transient phenomenon that has not perturbed inflation expectations, many of America’s poor are finding that food inflation (something I have called “agflation” in the past) is the pest that refuses to leave. In “Rising food prices could drive up rates of hunger“, John Sepulvado of CNN Radio paints a poignant portrait of America’s growing population of hungry poor.
The statistics are staggering but the personal tales of struggle are even more potent. Here is a description of the current life of Wendy Madison of Opelika (emphasis mine):
“…there was a 10-year period where her family was doing well, before her husband Joseph had a massive heart attack. She says her family’s biggest mistake is they failed to plan for such hard times, and didn’t save.
Now, their family of three depends on a little more than $1,000 dollars in disability pay, along with $294.00 in food stamp benefits per month — the equivalent of a dollar per meal. Madison says her food stamp benefits have not increased despite rising food prices. An increase in benefits have been denied repeatedly — leaving the Madisons ‘begging for food while going hungry.’
‘It makes you feel useless,’ Madison says, ‘like your government is waiting for you to die so they don’t have to help you anymore.'”
Regardless of your position on Federal assistance programs, stories such as these are stark reminders that inflation is very real for a significant portion of our country. Another way to think about the issue is that despite all the money the Federal Reserve has printed through QE1 and QE2, very little has yet to get to the people in the most dire need of it, whether through jobs, higher wages, and/or assistance. Yet, this same printing is very likely exacerbating the upward pressure on the items that consume large portions of the budgets of the poor: food and energy.
Thanks to a CNBC article titled “US Cost of Living Hits Record, Passing Pre-Crisis High” by John Melloy, I discovered/realized that the chained consumer price index has now returned to its pre-recession highs. This index measures the cost of living for Americans living in urban areas. You can think of it as the cumulative impact of inflation over time. In 2000, this index measured 102 (normalized to 100 for 1999). It hit an all-time high of 126.918 July, 2008, right before the recession savaged the economy. This cost of living index hit 127.429 in February (2011). (Click here to get the historical data – select “C-CPI-U US All Items – SUUR0000SA0”)
Source: Bureau of Labor Statistics
Melloy appropriately observes at the end of his article:
“The cost of living for Americans is now above where it was when housing prices were in a bubble, stock prices at a record, unemployment low and consumer confidence was soaring. Something has gotta give.”
It is difficult to predict how these inflationary pressures will resolve themselves – having more historical data on this index could help. But at least this small window on overall cost of living provides one more confirmation that a fear of deflation remains misplaced sentiment.
The Swiss National Bank (SNB) announced its latest monetary policy today with the very provocative title “Swiss National Bank maintains its expansionary monetary policy.”
“The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. It is leaving the target range for the three-month Libor rate unchanged at 0.0–0.75%, and intends to keep the Libor within the lower part of the target range at around 0.25%.”
The SNB goes on to outline economic conditions around the globe highlighting the strengths and weaknesses. Interestingly, the Swiss economy has done relatively well despite the record strength in its currency. Specific areas of weakness are tourism and exports, both highly dependent on relative exchange rates.
On balance, the SNB found it necessary to increase its near-term inflation forecast a bit. The SNB also again acknowledged that it cannot maintain its current expansionary monetary policy given its expectation that inflation will exceed its upper limit of 2% by 2013. With its currency too strong for comfort, the SNB is clearly trying to wait as long as possible before moving to head off these higher than desired inflation levels. It is a dilemma more and more central banks will feel as the U.S. dollar continues to sink against every major currency.
From the monetary policy statement:
The recent acceleration in the franc’s strength, especially against the U.S. dollar, is a continuation of a longer-term trend. The franc is now trading at record levels against the U.S. dollar.
This week, Dartmouth’s President Jim Yong Kim defended recent tuition hikes in front of an assembly of students. The Dartmouth reports in “Kim fields students’ criticism, questions” that Kim justified the tuition hikes by blaming the budget deficit. Kim went on to remind students about the “bargain” they receive with a Dartmouth education and the high lifetime value generated by this education:
“Despite the increased cost, the College is still discounting students’ educations — which are worth twice the amount of tuition costs — by 50 percent…
Kim emphasized the value of an Ivy League education, citing the evaluations of economist and Yale University President Richard Levin. Levin estimated that a four-year college degree increases an individual’s income by 40 percent…”
Kim also claimed that financial aid is absorbing much of the hit for needy families.
Kim’s stance on return on investment (ROI) sums up the defense best: “Your return on investment of going to Dartmouth is higher than it’s ever been before.”
I could not tell from the article whether these answers mollified any frustrated students, but I think they are on the right track to question these constant price hikes that well-exceed the existing level of inflation.
“The Obama administration is considering tapping the Strategic Petroleum Reserve in response to rapidly rising gasoline prices brought on by turmoil in the Middle East, the White House chief of staff, William M. Daley, said on Sunday.”
While energy prices are excluded from core measures of inflation, fears are rising along with oil prices that the on-going fragile economic recovery could soon be stymied. The administration is understandably trying to proceed cautiously. For example Energy Secretary Steven Chu noted:
“We don’t want to be totally reactive so that when the price goes up, everybody panics, and when it goes back down, everybody goes back to sleep.”
Moreover, as the fighting in Libya grows worse, and the Gaddafi regime digs in its heels, the prospects grow for an extended civil war. Under such a scenario, the strategic oil reserve may prove inadequate for keeping a lid on oil prices. Supplies may not even be disrupted in a significant way, but the fears of larger disruptions could be enough to continue propelling prices higher.
In “China says cannot lower guard against inflation“, Reuters reports that “China’s Premier Wen Jiabao said on Saturday inflation was affecting social stability, and taming it was a top priority for this year…The government is aiming for annual average inflation of 4 percent in 2011, higher than the 3.3 percent rise in consumer prices last year.”
The article notes several measures Chinese authorities are taking to curb inflation, everything from increasing food supplies, reducing transportation costs, and controlling the money supply and bank lending. These measures seem to be working, but the Chinese are not declaring victory just yet…
Steve Hansen at “Global Economic Intersection” presents a compelling case arguing that food prices should be included measures of core inflation (the Consumer Price Index, or CPI). Hansen simply looks at the history of the core CPI excluding food and energy versus CPI for food only versus CPI for energy only and comes to the easy conclusion that “…there is strong correlation between food price increases and the overall Consumer Price Index (CPI)…with only rare periods of exception.”
His closing remarks on the topic are a vivid reminder of one of the many reasons I care so much about “Inflation Watch”:
“Inflation is a very personal enemy for most Americans who live paycheck to paycheck. When your paycheck does not get larger, and the prices go up – you must cut something out of your life. And when Fed Chairman Bernanke says inflation is low – you know that he is addressing the segment of the population which does not live paycheck to paycheck.”
Suddenly, former Federal Reserve chairman Alan Greenspan knows inflation. In fact, he now sees inflation as a real danger. Greenspan discussed a variety of economic topics with a crew from CNBC. I was quite intrigued, and VERY surprised, at his commentary on inflation and even gold. It is as if retirement has brought on an inflationary epiphany. Stepping away from the printing presses of currency has delivered some remarkable clarity…somehow.
Here are some highlights that were of most interest to me (bold emphasis mine):
- Inflation premiums are building up in the “out years”, but none of these indicators (TIPS, out year treasury yields) will tell you when inflation is about to take hold, and certainly not when the bond markets are going to move.
- In 1979, 10-year treasuries were yielding 9% and all the indicators told prognosticators that yields had peaked because the U.S. was not an inflationary economy – over the next 4-5 months, yields went up 400 basis points.
- Greenspan has always been somewhat skeptical of the output gap – the stagflation of the 1970s proved that “it is not an infallible indicator.”
- The general assumption about measures of core inflation is that food and energy fluctuate, but have no trend. That is incorrect.
- Rising incomes have shifted diets toward more protein, requiring more wheat crops while at the same time we are running out of arable land. This will create a long-term uptrend in food prices.
- Concerns over the security of oil supplies will also put oil prices on an upward trend.
- Over the counter derivatives (futures) have encouraged more storage of oil above ground in developed nations, providing a buffer. Otherwise, oil would be even higher right now.
Greenspan’s commentary on gold perhaps hearkened back to his pre-Fed days when he wrote “Gold and Economic Freedom” back in 1966. The quotes below come from CNBC’s transcript of the larger interview. He made these comments after pointing out that both the euro and the U.S. dollar are flawed fiat currencies (imagine what could have happened in currency markets if Greenspan made such an observation while he was Chairman!).
“What the price of gold is saying, is that there elements within the marketplace that feel very uncomfortable with respect to what is going on generally, and its not an accident that you’re finding that central banks are going in to buy gold and one of the reasons is gold is historically one of the rare media of exchange that doesn’t require any collateral or backing, counter signatures, gold is universally acceptable as a means of payment.”
“I’m not saying we can or should go back on the gold standard, that would be extremely difficult, and it would require such cast changes that this society has made no indication that it wants to do that, but I do think to get a sense of the stability of the system, watching the price of gold is not too bad.”
The overall discussion begged the obvious questions on monetary policy. It is not clear to me whether Greenspan’s characterization of existing inflationary pressures compels any changes, especially given these underlying forces are out of the Fed’s control.
Disclosure: author is long TIP and TBT