Inflation may be forcing China to let its currency appreciate

In “Beijing turns to currency to cool inflation“, the Associated Press gives a good summary of China’s current problems with inflation, including the following:

“Economists blame China’s inflation on the dual pressures of consumer demand that is outstripping food supplies and a bank lending boom they say Beijing allowed to run too long after it helped the country rebound quickly from the 2008 global crisis.

Attempts at price controls, subsidies for the poor and orders to local leaders to guarantee adequate vegetable supplies have had mixed results.”

The failure to control inflation to-date is forcing China to allow the currency to appreciate faster. The near-term increases still seem modest at 5% (against the dollar), so it will be interesting to see whether China continues pushing harder on non-currency methods.

China’s currency is not traded on open markets, but if it were, it seems the currency would soar given current conditions.


Deltic Timber riding all-time highs despite declines in lumber prices

Deltic Timber (DEL) reported earnings earlier this week that were severely down year-over-year. DEL, a $844M market cap company based in Arkansas, blamed a depressed housing and construction market that has forced timber prices lower.

Here is the related commentary from the press release:

“Lumber prices in 2010 [benefited] from a supply-side driven price increase primarily caused by a sawmill log supply shortage due to inclement weather in the southeast portion of the U.S…

…[There are] continued depressed economic conditions for the forest and building products and residential and commercial real estate development businesses. We remained profitable even with persistent record-low prices for pine sawtimber, lack of the usual spring building-season benefit to lumber prices, continuation of a depressed residential real estate market, and absence of a commercial acreage real estate sale.”

The average sales price for pine sawtimber remained level at $26/ton with last year’s first quarter. Pine pulpwood plummeted over this same period by 50% to $8/ton. Average lumber sales price fell 14% over this period to $266 per thousand board feet. No forecasts were provided for future prices.

One of the few areas of the economy the Federal Reserve has failed to inflate continues to be mired in recession-like conditions. Thus motivating the Fed to continue to be accomodative in its monetary policy. On the other hand, these depressed conditions have not prevented Deltic’s stock from performing well. Stocks have, of course, well-benefited from the Fed’s printing of money. Corporate profits are now at all-time highs and DEL expects to turn in good profit performance going forward.

Despite poor market conditions, Deltic Timber's stock is at all-time highs

Despite poor market conditions, Deltic Timber's stock is at all-time highs


Whirlpool passes higher costs to customers

Whirlpool (WHR) reported earnings yesterday and indicated that the company is sticking by its full-year guidance despite increasing cost pressures. WHR has been able to pass some of these costs to its customers through price increases:

“Despite a substantial increase in material and oil-related cost inflation, we are maintaining our full year earnings and cash flow outlook…We have implemented cost-based price increases in many regions around the world, continue to introduce a strong cadence of innovative new products and remain focused on accelerating our cost reduction and productivity improvements to manage higher material cost inflation.”

Whirlpool's stock has made very litle progress since a rapid recovery in 2009

Whirlpool's stock has made very litle progress since a rapid recovery in 2009

Disclosure: author owns WHR


The U.S. Dollar Can’t Find A Bottom

CNBC reported that “Adjusted For Inflation, Dollar Hits Fiat-Era Low.” Economists at Deutsche Bank calculated the value of the dollar on a trade-weighted basis and then made adjustments for inflation. Their conclusion is that the dollar is at its lowest point since the U.S. went off the gold standard under President Richard Nixon.

The full article is worth a read but here is a key quote:

“The recent parabolic spike in silver and to a lesser degree gold, shows that the market considers a ‘disorderly decline’ of the U.S. dollar an increasing possibility…”

Gold has trended straight up since its recession lows

Gold has trended straight up since its recession lows


Source: stockcharts.com

Click here to see how the U.S. stock market remains in an 11-year sell-off when priced in gold.

Gold also looks to continue higher. According to a recent article in Bloomberg:

“Central banks that were net sellers of gold a decade ago are buying the precious metal to reduce their reliance on the dollar as a reserve currency, signaling demand that may extend a record rally in prices.”

Silver's rise has accelerated over the past year

Silver's rise has accelerated over the past year


Source: stockcharts.com

Disclosure: author owns GLD, PAAS


Panera Bread expecting just modest inflation in second half of 2011

Panera Bread (PNRA) will be raising prices and expects the increases to stick. In narrowing guidance for sales growth from 4.0% to 6.0% to 5.0% to 6.0%, PNRA stated the following:

“This target assumes transaction growth of 2.5% to 3.5% and average check growth of approximately 2.5%. The increased average check growth target is primarily a result of an incremental 1.0% price increase the Company intends to take to offset increased inflation in the latter part of 2011. The incremental price increase and increased inflation are expected to offset each other at the operating margin line and have no impact on the Company’s earnings per diluted share target.”

PNRA is one of the best run operations in the casual dining segment, so it is no surprise they have been able to manage costs and pass along price increases without skipping a beat. The stock has been making fresh all-time highs for almost a year now.

Panera Bread bounced back from the recession quickly and strongly

Panera Bread bounced back from the recession quickly and strongly


From the baby’s room to the bathroom to the kitchen, Proctor & Gamble raises prices

In a refrain similar to Kimberly-Clark’s lamentations, Proctor & Gamble (PG) announced an increase in prices in some paper-based products in response to rising pulp, oil, and gasoline costs. In “P&G raising some prices for retailers“:

“P&G said list prices for Pampers are up 7 percent on average, Pampers wipes up 3 percent, and Charmin and Bounty products up 5 percent. P&G said Luvs, its lower-priced diaper brand, remains unchanged.”

Proctor & Gamble's stock has not made any progress for over 18 months

Proctor & Gamble's stock has not made any progress for over 18 months

Disclosure: author is long PG


Kimberly-Clark Keeps Hiking Prices

A little over a month ago, Kimberly Clark (KMB) announced it was raiding North American nurseries and bathrooms with price increases:

“[The] baby and child care and consumer tissue businesses are notifying customers of plans to raise prices in North America during the second and third quarters of 2011…

…Net selling prices in the U.S. and Canada for Huggies baby wipes and diapers, Pull-Ups training pants and GoodNites youth pants will increase on average between 3 and 7 percent, with implementation timing ranging from June 19, 2011 to August 17, 2011. In addition, net selling prices in the U.S. for Cottonelle and Scott 1000 bathroom tissue will increase approximately 7 percent, effective June 19, 2011. The price changes vary by brand and pack size.”

KMB blamed, you guessed it, the rising costs of commodities and raw materials. In today’s earnings release, KMB increased its inflation expectations:

“Inflation in key cost inputs of $450 to $550 million compared to the previous assumption of $200 to $250 million. This reflects estimated average market pricing for benchmark northern softwood pulp of $1,000 to $1,020 per metric ton and average oil prices of $100 to $105 per barrel for the year. The increased inflation assumption is primarily due to higher costs for virgin pulp, polymer resin and most other oil-based materials. “

From the earnings conference call (following quotes from Seeking Alpha transcripts):

“Clearly, the environment is much more challenging since we talked to you last at the beginning of this year. Market pulp costs did not fall in the first quarter like we and most others had assumed. Instead, costs rose in March, and over the next few months, are likely to hit or potentially even exceed the peak levels that occurred last summer.

In addition, as we all know, oil prices have risen rapidly to over $100 a barrel, this is well above what we planned for and it’s caused prices for many of our oil-based cost inputs to increase considerably. For example, polymer costs are up about 20% both year-over-year and sequentially from the fourth quarter of 2010. Similarly, superabsorbent costs are up 15%, and costs for both of these key materials are expected to increase further in the near term.”

During the earnings conference call, KMB made it clear that they are taking a multi-faceted approach to addressing their inflation problem:

“We’re responding to the significant pickup in cost inflation in three primary ways: First, we’re raising selling prices across a number of our businesses; second, we’re accelerating or implementing additional FORCE cost savings programs; and third, we’re focused on managing our overhead spending aggressively.”

In addition to March’s announced price hikes, KMB will be taking pricing actions worldwide:

“We’re also in the process of raising prices in many areas of K-C International, particularly in Latin America.

And our B2B businesses are also taking pricing action, including a North American K-C Professional price increase that we announced last week. So as a result, we now anticipate that price and mix improvements will deliver 1 to 2 points of revenue growth in 2011. That’s up from our original assumption of about 1%.”

It seems there more and more upward pricing pressures are surfacing for the Federal Reserve to dismiss. Investors did not dismiss the bad news, sending KMB down 2.7% on the day.

Kimberly-Clark's stock dropped on the earnings news, but it is still up for the year

Kimberly-Clark's stock dropped on the earnings news, but it is still up for the year


Prices drop for smaller business jets

I was a bit surprised to read the Financial Times report that the prices of smaller, used business jets have “plunged to new lows.” FT.com explains that a one-year-old Learjet can be had for a 40% discount from the purchase price of a new jet. New jets are down 25-35% over the past 2-3 years as deliveries between 2008-2010 have dropped 57%.

Larger jets have fared much better due to a more well-off clientele like celebrities, billionaires, and governments.


Can the Oil and Gas Price Fraud Working Group Succeed Without Examining Monetary Policy?

Time for some comedic relief. On my main site “One-Twenty Two” I posted my own satirical commentary on the recent announcement from Attorney General Eric Holder about the formation of the Oil and Gas Fraud Working Group. This taskforce is supposed to ensure prices properly reflect “real” supply and demand factors from the marketplace. In my post, I ponder what the story would look like if Holder decided to go after the Federal Reserve’s role in generating higher oil and gas prices (mainly through killing the U.S. dollar). Click here to read it.


Prices for lamb at record highs

“Agflation” remains strong.

The price of lambs is up 58% to $2.20/pound, a record high. Wool prices are also at 20-year highs.

While demand for lamb has been strong, supply has suffered, especially amongst Australian and New Zealander farmers. In “Sheep growers benefit from low supply, high demand“, Yahoo! Finance reports through AP:

“Australia has about 70 million sheep, down from 170 million 20 years ago. The drop has been blamed on the ending of a government support program and extended drought followed by recent flooding…In New Zealand, sheep numbers have dropped from about 70 million to 40 million, and many producers have switched to dairies and beef production.”

The American Sheep Industry Association has an aggressive plan to rebuild the inventory of sheep and capitalize on current market conditions:

“The campaign to be launched in 2011, titled 2+2+2= Rebuild, asks that each producer increase the size of their operation by two ewes per operation or by two ewes per 100 by 2014, increase the average birthrate per ewe to two lambs per year and increase the harvested lamb crop rate by 2 percent. This program provides an attainable, challenging, measurable and realistic plan for increasing sheep numbers in the United States and maintains jobs and infrastructure – past studies have shown that for every 1,000 head of ewes, 18 jobs are created. Importantly, the program will provide approximately 315,000 more lambs and 2 million pounds of wool for the industry to market.”


Atlanta median home prices drop to 1997 levels

The Atlanta-Journal Constitution (AJC) reports numbers from the National Association of Realtors and various analysts indicating that the year-over-year $14,600 drop in the median home price to just under $100,000 brings prices to 1997 levels.

Sluggish housing prices are certainly a large contributor to the government’s reported low inflation numbers. One wonders how much longer the Federal Reserve is willing to keep printing money to try to resuscitate the housing market while its liquidity essentially goes everywhere else except the housing market!


Service sector inflation at historic lows as the Fed “shoots blanks”

And now for a different perspective…

In CNBC article “Data Double Take: Inflation for Majority of Economy at Record Lows“, David Rosenberg, chief economist & strategist at Gluskin Sheff, argues that inflation is not a threat in the U.S. because the service sector’s rate of inflation is at historic lows. Moreover, companies in the service sector have no pricing power and workers are unable to earn higher wages. These arguments all run counter to other findings demonstrating that CPI from any angle is pointing to inflation in the near future.

The most interesting claim in the article is that the Federal Reserve’s printing press is, in effect, churning out fresh dollars at no cost:

“The Fed may be printing money, but it’s not multiplying through the economy like it once did. That’s because banks are not using it to extend credit, said the economist. Also, our economy has generally become more resistant to the Fed’s reflation powers because of productivity gains from technology and globalization, the doves say.

‘The money multiplier has been broken for quite some time, and recently it is going lower,’ said Brian Kelly, of Brian Kelly Capital, citing money supply data that for every $1 pumped into the economy only 76 cents is being created. ‘In effect, monetary policy has been losing its potency for 30 years. What the Fed is doing now is stepping on the gas while the tires spin in the mud.'”

I would love to see more data on that because over those same 30 years the Federal Reserve’s monetary accommodations have been credited with creating shallow recessions before 2008, averting a complete financial meltdown in the last recession, and, most recently, driving stocks on a 30% rally since late summer of 2010. Of course, easy money from the Federal Reserve has also been blamed for assisting and outright creating the our triple bubbles in tech stocks, housing, and credit.

It seems that one’s inflation expectations often hinge on the imagination: either you believe the generally accepted inflation data as indicative of a tame future inflation outlook, or you look at specific (even pervasive) examples of inflationary pressures as warnings of what is to come. I have clearly been in the latter camp.


GM is the latest automaker to raise prices

General Motors (GM) became the latest automaker to announce a price increase. Bloomberg reports that GM is raising prices 0.4% (about $123 per car). Toyota and Ford announced comparable price hikes over the past three weeks. GM blames higher commodity prices for the increase.

The stock is currently trading at a post-IPO low.

GM has traded downward for almost all of 2011

GM has traded downward for almost all of 2011

Disclosure: author owns shares in GM


Looking at CPI from all angles suggests an imminent problem

I typically ignore most of the inflation numbers reported by the government, but I could not resist reading Calafia Beach Pundit’s latest piece titled “Consumer price inflation is heating up.” Calafia takes a look at the CPI from all angles, month-over-month, year-over-year, rate of change, and even non-seasonally adjusted (which is the basis for payments to TIPS). Calafia convincingly demonstrates that all arrows are pointing upward for inflation. He even concluded that China’s current struggles with inflation will be America’s future inflation problem:

“The ongoing rise in China’s inflation rate is making headlines today, but U.S. inflation is not too far behind, as this chart shows. It’s not surprising that inflation should be moving higher both in China and the U.S., since China has essentially outsourced its monetary policy to the U.S. Federal Reserve by pegging the yuan to the dollar. Chinese inflation is somewhat more volatile than ours, and that is also not surprising since its economy is smaller and less burdened by long-term supply and labor contracts. If China has an inflation problem, then so does the U.S. It will just take longer for the problem to become obvious in the U.S.”

This piece is a must-read.

Disclosure: author is long TIPS


Fleckenstein declares deflation “dead”

I am two months late on this one.

In February, Bill Fleckenstein refuted the notion that inflation is a net positive in “No such thing as good inflation.” He starts by noting how higher prices in commodities are driving inflation expectations upward:

“As unprecedented amounts of liquidity from the Federal Reserve have worked their way through the financial system and into the real world, I believe inflation psychology has changed. People have seen larger price increases in commodities and are resigned to accept them, which will set the stage for additional rounds of price hikes.

Once that psychological shift becomes entrenched, it will be extremely hard to reverse, despite Fed Chairman Ben Bernanke’s stated certainty that he can keep prices under control…”

Fleckenstein goes on to insist that as long as the Federal Reserve is allowed to play free and loose with the dollar, deflation will not happen in America:

“I would like to officially declare the topic of deflation dead. As I have long maintained, we may actually experience deflation if the bond market rebels and takes the printing press away from the Fed. However, in the absence of that, it should be clear by now that deflation is not going to visit the shores of America.”

I made a related point back in October, 2008. Back then I thought we would see elevated inflation levels no later than 2010. Regardless, Fleckenstein provides to a great reminder that inflation is, and has always been, the threat once the Federal Reserve started throwing freshly printed bills at our economic calamities.


Deloitte survey suggests inflation expectations are not anchored


Shadow Government Statistics reports a 9.6% inflation rate using pre-1980 methods

CNBC provides a revealing summary of the latest newsletter from Shadow Government Statistics (SGS). According to SGS, inflation is running at a 9.6% clip using BLS methods in place before 1980 that did not use hedonic adjustments to try to account for the change in quality of products. Rolling back just 22 years gives a 5.5% inflation rate.

See “Inflation Actually Near 10% Using Older Measure” for more details.


Compensation in High Tech Inflating Labor Costs

In “Salaries at Apple, Google a big investor concern – Commentary: Higher pay, benefit costs driving up expenses,” Marketwatch writer John Shinal laments that:

“Given that every full-time employee gets health insurance and other benefits that make up anywhere from a quarter to half their overall compensation, and that health-care costs are rising in the double-digit percentages, it’s safe to assume that U.S. tech companies are seeing employee costs rise in the double figures, as an annual percentage.”

In 2009, wages in high tech went up 5-10%. So Shinal’s assessment is consistent with a labor market that was relatively tight even at the height of the recession and beginning of the recovery.


Small businesses getting bolder about price increases

In “Inflation Hits Main Street: Small Businesses Raising Prices,” CNBC reports that the National Federation of Independent Business found increasing interest in price hikes amongst its members:

“More than a quarter of small businesses are raising prices, or plan to soon, the highest amount in 28 months…”

The net number of small businesses already raising prices went positive for the first time in 2 1/2 years.


Input costs drive more price increases at AK Steel

What’s a debate about inflation without more price hikes from a steel company?

AK Steel (AKS) announced additional surcharges today based on “…reported prices for raw materials and energy used to manufacture the products.” This announcement is one more small reminder of how commodity price pressures begin pushing their way through the supply chain:

“AK Steel…has advised its customers that a $390 per ton surcharge will be added to invoices for electrical steel products shipped in May 2011.”

Disclosure: author owns shares in AKS