Coca-Cola raising soft drink prices for a second time in 2011

Coca-Cola Company (KO) raised prices on soft drinks 2% earlier this year. Reports are coming out now that the company will raise prices again on July 31. This time it will be a 3-4% pop.

See “Coca-Cola to raise prices in July” for more details.


Rare earth prices picking up again

The prices of certain rare earth elements (REEs) are soaring again.

From Bloomberg (June 17) – “Rare Earth Prices Double on China, Industrial Minerals Says“:

“Dysprosium oxide, used in magnets, lasers and nuclear reactors, has risen to about $1,470 a kilogram from about $700- $740 at the start of the month…

…Europium oxide, used for its phosphorescent properties found in plasma TVs and energy-saving light bulbs, has risen to as much as $3,400 a kilogram from between $1,260-$1,300”

China’s efforts to gain further control over its rare earth industry (centralize) were partially blamed for the price run-up. Also note that rumors have surfaced that China is putting plans in place to create a strategic reserve for heavy REEs to complement its strategic reserve for light REEs.


Cost of private school is up 79% over 10 years in New York City

The Wall Street Journal reports that for the first time ever a private school in new York City will charge over $40,000 per year for tuition. This is part of a larger upward trend in prices that has pushed the cost of private education in New York City up 79% over the last 10 years:

“The Riverdale Country School will charge $40,450 for high-school students in the coming year, the first time a New York private school has topped $40,000 in annual tuition.

Tuition costs at the city’s private schools, which breached $30,000 just five years ago, have climbed 79% in the past decade. The best schools have no trouble getting enough students.”

Interestingly enough, the affluent parents who pay these tuition charges – charges that are comparable and sometimes higher than the cost of Ivy League colleges – are apparently not complaining!

The article includes cost comparisons at the city’s top independent high schools.


Bank of England Governor King continues to bet on inflation taking care of itself

On June 15, Bank of England Governor Mervyn King spoke at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London at the Mansion House. The speech covered very familiar themes for King and the Bank of England.

King begins by acknowledging the squeeze on the current economy:

“The challenge facing monetary policy is obvious – the combination of high consumer price inflation and weak economic growth. Both of these might seem surprising given the large amount of spare capacity in the economy. But the rise in world energy and other commodity prices, and the need to reduce both the external and budget deficits, are squeezing real living standards, pushing up on consumer price inflation and slowing domestic consumption.”

Over the years, King has consistently hammered on the theme of rebalancing in the UK’s economy: a transition away from domestic consumption and toward exports and the business investment required to support this shift. King indicated that the rebalancing underway will continue for several more years. This process has necessitated the devaluation of the currency. Interestingly, King cleverly attributes the devaluation to market forces while indicating the Monetary Policy Committee (MPC) chose not to counter-act the pressures on the currency:

“A necessary precondition for that rebalancing was a fall in the real exchange rate. Markets anticipated that need. The nominal effective sterling exchange rate fell by around 25% between the start of the crisis in 2007 and the beginning of 2009, since when it has been broadly stable…

…We could have raised Bank Rate significantly so that inflation today would be closer to the target. But that would not have prevented the squeeze on living standards arising from higher oil and commodity prices and the measures necessary to reduce our twin deficits. And it would have meant a weaker recovery, or even further falls in output…”

In other words, the MPC decided to focus on the implications of a weak economy over the implications of high inflation, judging the former to be the greater threat. In doing so, King has frequently noted that today’s high inflation is temporary, thus rationalizing on-going accomodative monetary policy and low interest rates in the face of high inflation. The primary blame for high inflation has shifted from hikes in taxes (the Value Added Tax or VAT) to commodity and energy prices, both presumably out of the control of monetary policy. Internally, conditions do not exist for sustaining “domestically generated” inflation:

“So far, subdued rates of increase in average earnings, as well as remarkably – some might say disturbingly – low growth rates of broad money have provided strong signals that inflation will fall back in due course. Banks are still contracting balance sheets and reducing leverage. Spreads between Bank Rate and the interest rates charged to many borrowers remain at unprecedentedly high levels, if indeed borrowers are able to access credit at all.”

King really caught my attention when he provided two key conditions that would actually compel rate hikes:

  • A pickup in domestically generated inflation
  • A contraction in the spreads between Bank Rate and the interest rates charged to many borrowers

Given the dour outlook for the economy and an on-going reblancing in the economy, I continue to assume that rate hikes in the UK are somewhere off in a very distant future. King has proven quite adapt in coming up with reasons for maintaining loose monetary policy, and I continue to see strong evidence that he is reluctant to tighten for fear it could upset the rebalancing he so deeply desires. Indeed, King notes that there is no way to tell when the MPC may hike rates:

“Uncertainty inevitably surrounds both the speed of the rebalancing and the impact of today’s consumer price inflation on tomorrow’s domestically generated inflation. So it is simply impossible to know now at what point monetary tightening will begin.”


Million-dollar homes appreciating in Silicon Valley

In “IPOs Boost Demand for Silicon Valley Mansions“, Bloomberg attributes the robust housing market in Silicon Valley to the increasing numbers of instant millionaires benefiting from IPOs. The price gains are startling given the second-dip recession that has descended upon so many other neighborhoods across America (for the latest see “US Housing Crisis Is Now Worse Than Great Depression.”)

“The real estate gains in the valley, located primarily in the San Jose metropolitan area, are mostly occurring in towns where million-dollar values are already the norm. The median price in Cupertino gained 12 percent last month from May 2010 to $1.08 million, and values in Saratoga rose 4.7 percent to $1.62 million, according to San Diego-based DataQuick…

…The median price of single-family houses sold in Palo Alto, home of Facebook Inc., climbed 20 percent in May from a year earlier to $1.63 million, the biggest jump since 2008, according to preliminary figures from research company DataQuick. In Mountain View, the base of LinkedIn Corp., prices rose 3.1 percent to $957,500, the ninth year-over-year gain in 12 months.”


Diamond prices up 17% in the first quarter

In “Diamond Prices Set To Sparkle“, CNBC reports that diamond prices increased 17% in the first quarter of this year. While the U.S. remains the biggest market for diamonds at 40% of sales, Indian and Chinese demand is rapidly rising. DeBeers thinks it may have to double output in 15 years at China’s current rate of growth. This will mark quite a turnaround for the diamond company as it turned in a loss in 2009 and required a $1B “injection” of capital to stay afloat.


Asian inflation may finally be cooling

Thanks to improvements in crop production, monetary tightening, a slowdown in economic growth rates, and currency appreciation, the trend now appears to be heading down for core and headline inflation in Asia. Different countries are wrestling with different problems, but, overall, economists and analysts quoted in “Food Inflation Begins to Moderate in Asia” seem to be getting optimistic about the prospects for inflation.

The article includes some statistics on the huge difference in price trends on various food items in India:

“The cost of bananas in New Delhi is up 50 percent over the year, while paneer – a form of cottage cheese – has risen 26 percent to 145 rupees per kg.

Yet other food prices are falling. Staples such as tomatoes and potatoes, which peaked earlier in the year at levels that caused great stress to poorer families, have seen prices moderate in recent weeks.”


Reflation celebration for corporate executives in Arizona and Georgia

The spotlight is shining bright these days on executive pay. I have cited several stories regarding the tremendous increases in executive pay that occurred in 2010 that resoundingly reversed (and then some) stagnation and sometimes declines in executive pay in 2009. (See for example, “Pay rises 13% for CEOs at Canada’s top 100 public companies” and “CEOs recover all the pay they lost during the recession” or review articles under the category “Salaries“).

This weekend, I noted two state-based stories on executive pay that demonstrated how dramatic a turn-around has occurred in the pay for specific executives.

In “Lucrative paydays for corporate chiefs“, the Atlanta-Journal Constitution reports:

“Here’s one measure of just how good it was: $232.9 million.

That’s the total compensation that the chief executives at Georgia’s 25 most-valuable public companies took home last year, according to The Atlanta Journal-Constitution’s review of the annual disclosures required by the Securities and Exchange Commission…

Here’s another measure of just how lucrative 2010 was: 29 percent. That’s the average pay raise the 25 executives saw last year.”

In “Arizona CEO’s median compensation surged 48% in 2010“, The Arizona Republic reports:

“Sparked by rising profits and rebounding stock prices, the median compensation for chief executive officers and chairmen at Arizona-based public companies surged 48 percent in 2010, hitting a statewide record of $1.54 million.

Plus, hefty pay packages were shared more broadly by other top officials at 43 corporations based in the state. Some 74 senior executives below the CEO level earned at least $750,000, up from 63 who earned that much the year before.”

In both cases, compensation swelled partially thanks to a strong rebound in the stock market, meaning that corporate executives have greatly benefited from the reflation generated by economic stimulus and/or monetary easing. As I have mentioned in previous posts, strong corporate profits have supported all forms of equity-based wealth and effectively beat back the ghosts of deflation in 2010.

Of course, the huge irony is that poor employment reports and stagnating personal income data tell a different story. For example, after Friday’s awful jobs report and the on-going dire news coming from the housing market, you would be excused for assuming the entire country had dipped back into a poverty-stricken recession. Such is definitely not the case for the big winners of 2010.


The Federal Reserve May Choose to Ignore the Inflation Expectations of Households

(Originally appeared in “One-Twenty Two“)

First, Bernanke made it clear he thinks gold is not a good indicator of inflation expectations. Now, the Federal Reserve Bank of San Francisco has produced research that could convince the Fed to insulate itself from the inflation expectations of average Americans in “Household Inflation Expectations and the Price of Oil: It’s Déjà Vu All Over Again” by Bharat Trehan (thanks to Bill Fleckenstein for calling this article to my attention).

Household inflation expectations have risen to 4.5% from 3% at the end of 2010. Fortunately for the Federal Reserve, its empirical research seems to show that household expectations have become inaccurate and irrelevant for monetary policy:

“This Economic Letter argues that the jump in household inflation expectations is a reaction to the recent energy and food price shocks, following a pattern observed after the oil and commodity price shocks in 2008. The data reveal that households are unusually sensitive to changes in these prices and tend to respond by revising their inflation expectations by more than historical relationships warrant. Since commodity price shocks have occurred relatively often in recent years, this excessive sensitivity has meant that household inflation expectations have performed quite badly as forecasts of future inflation.”

Trehan admits that the University of Michigan’s Survey Research Center shows that households had been pretty good indicators of future inflation from the 1970s to 2000. However, over the past several years, the increased volatility in the prices of food and energy have misled consumers to anticipate more future inflation than is warranted given low levels of existing core inflation:

“The recent jump in the Thomson Reuters/University of Michigan measure of household inflation expectations appears to be related to increases in the prices of energy and food, similar to the jump observed in 2008. The size of this response to noncore inflation cannot be justified in terms of the historical relationships in the data. This disproportionate response is probably the reason why household inflation expectations have not done well as forecasts of future inflation in recent years, a period of volatile food and energy inflation. The poor forecasting performance argues against reacting strongly to the recent increases in household inflation expectations.”

Moreover, recent increases in inflation expectations are not justified by changes in monetary policy. Trehan speculates that…

“It’s also possible that households’ sensitivity to noncore inflation goes up following substantial, sharp increases in the price of energy and food items, such as those that occurred in the 1970s and over the past few years…This similarity to the 1970s is unsettling because it suggests that consumers are not accounting for the ways monetary policy has changed over this period.”

I assume this claim means that the Federal Reserve’s monetary policies have improved since the 1970s. In my opinion, we have seen even less reason to trust in the Federal Reserve’s policies to the extent that these policies “fix” economic problems in such a way to help set up the next crisis. These crises build while the Federal Reserve tends to reassure that it has everything under control and/or there is nothing happening to cause concern.

I would challenge the historical record and related regressions to suggest we need to consider whether the structural underpinnings of inflation are changing in ways that the Federal Reserve will be slow to recognize. Whether the Federal Reserve can do anything about these changes is another question.