Inflation May Be Dead, But Inflation Watch Is Not

Things have been pretty quiet around here. Every now and then I see a story about rising prices somewhere in the world and think the story would make a great quick post for Inflation Watch. However, I usually do not feel the same sense of urgency I had from 2008 through about 2011 when I felt that rapid inflation was the imminent result of extremely accomodative monetary policy. Everywhere I look, commodities continue to decline in price. Most commodities reached a peak in 2011 and that peak of course had me convinced more than ever that inflation was soon to be a big problem.

Now, thanks to a friend, I am ever closer to accepting that inflation may not be a problem for an even longer time than I expected. He sent me a link to an article called “The Fed won’t taper as long as inflation is low” (by Rex Nutting at MarketWatch) that makes the convincing case that not only is inflation low, but the Federal Reserve has so far seemed powerless to generate the inflation it wants. (I recognize the limitations of government data on inflation, but I do not subscribe to theories that they are concocted specifically to hide true inflation). Incredibly, core inflation is apparently at its lowest point since 1959 (the core PCE price index):

Rex Nutting uses this graph to make the point that all the Fed's QE have failed to go reflate according to the Fed's goals

Rex Nutting uses this graph to make the point that all the Fed’s QE have failed to go reflate according to the Fed’s goals

Nutting also links to a paper from the Federal Reserve Bank of New York called “Drilling Down into Core Inflation: Goods versus Services.” In this paper, authors M. Henry Linder, Richard Peach, and Robert Rich demonstrate that more accurate inflation forecasts come from breaking out CPI into a services and a goods component. Nutting uses this as reference for the claim that the Fed is failing because of global disinflation. This global disinflation is responsible for a decline in the prices of the goods component. Services inflation is much more sensitive to domestic forces (we all know about skyrocketing healthcare and education costs). However, I am not sure where housing sits on this spectrum. It seems to provide a crossroad of forces given housing is not tradeable but foreigners are certainly free to overwhelm a housing market with cash. Foreign demand is reportedly helping to drive up housing prices in some of America’s hottest housing markets like in California and some parts of Florida.

All this to say that, for the moment, inflation is all but dead. But “Inflation Watch”, this blog, is NOT dead. I remain vigilant because I believe that when inflation DOES come, the Federal Reserve will either be ill-equipped to handle it and/or unwilling to snip it early for fear of causing a severe economic calamity. I am a gold investor, and I am eager for another chance to invest in the midst of a commodity crash (I am LONG overdue for an update to my framework for investing in commodity crashes/sell-offs).

The chart below from the Reserve Bank of Australia (RBA) shows that commodity prices remain at historically high levels, mostly thanks to rapacious demand from China. The current relative decline is what is helping to drive goods inflation down. The 2011 peak was well above the pre-crisis peak where prices have fallen now. Also note that prices are much more volatile. I suggest that this chart should remind us that commodity prices are a tinder box that can flare up at anytime. Aggressive rate-cutting by the RBA should also help keep prices aloft.

From the Australian perspective, commodity prices remain historically high although they have returned to their pre-crisis peak.

From the Australian perspective, commodity prices remain historically high although they have returned to their pre-crisis peak.

So stay tuned. Just when everyone finally concludes that the world has reached a golden age of disinflation where surpluses abound across the planet…that could be the exact moment the tide turns.

Be careful out there!

Full disclosure: long GLD


Relative, not absolute, oil prices impact the economy

James Hamilton posted a quick study of the impact of oil prices on car sales in “Oil prices and the U.S. economy” in EconBrowser. Hamilton demonstrates from recent history that once the economy has made an adjustment to high oil prices, a subsequent price run will not impact the economy until it reaches new highs. In other words, oil prices must force the economy (consumers and businesses) to make new adjustments before a significantly negative impact occurs. Auto sales already greatly favor more fuel efficient vehicles, thus blunting the traditional drag on the auto sector as consumers shun bigger, gas guzzlers.

Oil’s relative share of consumer expenditures is another factor to consider. Amazingly, energy’s overall share of consumption has declined as gas prices have soared in recent months.

For more detail and data see “Oil prices and the U.S. economy


General Mills fighting food inflation with innovation

Tom Hudson from the Nightly Business Report just tweeted the following: “how @generalmills is fighting food inflation with innovation on @bizrpt exclusive CEO interview.”

Sounds interesting! I will try go post a summary of the interview and/or point to the transcripts and video.


Prices going up yet again at the company lunch counter

Last year, my company raised prices 4-5% on food in its cafeterias. With the ink on those price hikes only 10 months old, my fellow employees and I are getting hit with another substantial price hike. The planned 4% hike is once again well ahead of the general (reported) rate of inflation.

To add insult to injury, the cafeteria will now be charging by the ounce for frozen yogurt. I am sure this is a “Dr. Duru” policy given I am guilty as charged for piling on the chocolate good stuff as high as I can.

The inflation accountants may be relieved to know that we have also received expanded meal service in recent months. Perhaps a hedonic adjustment evens everything right out…


Despite declining coffee prices, Starbucks ($SBUX) hiking some prices by 1%

Although agricultural prices have generally decreaed for several months, coffee included, Starbucks (SBUX) announced today that it will hike the prices of some beverages by about 1% in the Northeast and the Sunbelt regions of the U.S. SBUX cites “the prices reflect competition in certain markets and higher costs for coffee, fuel and other commodities.”

Note that Starbucks stock was actually down today while the major indices experienced strong rallies.

For more detail see “Starbucks to raise prices in certain regions

Starbucks had a great 2011. Did today's news end the coffee run for now?

Starbucks had a great 2011. Did today's news end the coffee run for now?


Source: FreeStockCharts.com

Coffee prices have been sliding for months and ended 2011 down from 2010

Coffee prices have been sliding for months and ended 2011 down from 2010


Agflation finally slowing down

Global supplies of agricultural products are expanding, perhaps in response to past shortages. These forces are driving down prices and discouraging hedge funds from making bullish bets in agricultural commodities. According to Bloomberg in “Funds Reduce Bets on Rising Food Costs to Lowest in 27 Months: Commodities“, the bullishness of hedge funds has reached lows not seen in over two years.

Here is a key quote that describes the situation:

“World food prices tracked by the United Nations retreated for a fifth consecutive month in November, the longest decline in more than two years. The U.S. government said Dec. 9 that combined global inventories of corn, soybeans and wheat will be 3.2 percent larger than anticipated a month earlier. Cocoa capped its longest slump in 50 years last week on increasing supplies from Ivory Coast, the world’s biggest producer.”

DBA, the PowerShares DB Agriculturae Fund ETF, tells the story. the ETF has now sunk to 14-month lows. Today’s price marks the previous post-recovery high in 2009.

After going straight up for nine months starting in 2010, DBA has now gone nearly straight down since its April highs

After going straight up for nine months starting in 2010, DBA has now gone nearly straight down since its April highs


When is it really cheaper to make your food at home?

On Thanksgiving Day, NPR’s Marketplace included a follow-up segment to a story from 2009 on Jennifer Reese, a San Francisco woman who set out to determine when it is really cheaper to make things at home versus buying in the store. She has now published a book about her experience called Make the Bread, Buy the Butter: What You Should and Shouldn’t Cook from Scratch — Over 120 Recipes for the Best Homemade Foods.

Her general conclusion is that it is cheaper to do the “non-glamorous” things at home, but glamorous activities like raising chickens, goats, and turkeys cost too much in infrastructure to make it worthwhile. It is definitely cheaper to make your own bread and muffins but more expensive to make candied ginger. It is cheaper to buy lemonade than make it – not to mention all the effort it takes to squeeze the lemons. Reese also addresses convenience, food quality, and moral choices.

The book looks like a worthwhile read for those considering to beat higher food costs with homegrown and homespun creations.


Anticipating higher diamond prices

Investment funds are preparing to help investors chase higher diamond prices. Demand from India, China, and investors looking for trsuted hedges against the U.S. dollar are expected to keep driving diamond prices upward. For more see: “New Funds Target Expected Rise in Diamond Prices.”


High rare earth prices impact more and more products

In “China Consolidates Control of Rare Earth Industry“, the NY Times builds from a General Electric FAQ on rare earths (covered here) to describe the spreading impact of high rare earth prices. In addition to compact fluorescent bulbs, these prices are driving up the costs of giant wind turbines and hybrid gasoline-electric cars. Even Walmart has been forced to increase the price of the compact fluorescent bulbs it sells.

China’s efforts to consolidate its rare earths industry and to move it more effectively under the government’s watchful eyes promise to increase international pressures for manufacturers to relocate to China to get cheaper prices.

See the article reference above for more details.


Australian mining companies struggle with higher labor costs

Australia’s mining sector has done extremely well, largely from exports to a rapidly growing China, especially for commodities like iron ore and coal. This rising wealth helped Australia emerge from recession earlier than most other developed economies and prodded the Reserve Bank of Australia to hike interest rates multiple times.

This amazing growth has come with costs, primarily in the form of higher labor costs. In “Lovesick Miners Raise Costs for Rio, BHP,” Bloomberg describes how the isolation of work in the remote mining areas makes these jobs very unattractive. Mining companies like BHP Biliton (BHP) and Rio Tinto (RIO) not only have to pay extremely high wages as compensation, but they also must include other perks to help miners deal with the isolation. For example, work schedules for miners can include extended trips to major cities in between extended shifts. Still, major shortages of labor exist in many skills. Australia will likely need to rely more and more on foreign workers to do these jobs – the isolation THOSE workers will feel will likely be many times what Australian miners feel. So, this dynamic will be important to watch.

Overall, this article is a fascinating look into the lives of Australian miners and how their work impacts their ability to gain and maintain relationships.


Grocery prices falling in Switzerland

The Swiss franc has had an incredible run over the past two years that has accelerated in 2011 as many traders and investors have sought “safety” from the European sovereign debt crisis. The Swiss National Bank has utterly failed in its varied attempts to fight currency appreciation over this time. (See “No Currency Peg Yet for the Swiss Franc As SNB Escalates” for the latest in this drama).

At one point this year, the franc had gained over 30% on  the euro in the span of a few months!

At one point this year, the franc had gained over 30% on the euro in the span of a few months!


Source: dailyfx.com charts

A story out of Marketwatch provides a fascinating example of the impact of a much stronger currency: price deflation. In “Swiss supermarkets cut prices, cite franc strength” we discover Swiss shoppers are crossing the border to take advantage of their stronger currency to buy cheap goods in places like Germany and France. To win back the business, Swiss supermarkets are cutting prices and pressuring suppliers to lower their prices as well. Stories like these are important to watch as competitive devaluations continue to unfold across major currency countries.

Author disclosure: long USD/CHF


Gold prices squeeze margins at Marvell Technology

Gold has soared over the last six weeks. I never thought about its impact on manufacturing because I have believed gold is a very minor component of any production process. However, over at Marvell Technology (MRVL), high gold prices are squeezing margins enough to make the company plan switching to copper. From Seeking Alpha transcripts of MRVL’s earnings call on August 18:

“The price of gold has increased from about $1,200 per ounce a year ago, to over $1,700 today. This has eroded our gross margin by about 1.5% in that period. We are transitioning to copper, but this will take some time.”

MRVL also noted that foundry prices have fallen more slowly than expected, and the company is looking for new fabs with better pricing.

Author disclosure: long GLD and GG


Imperial Sugar squeezed by poor demand and high sugar prices

Last week, Imperial Sugar (IPSU) lost 59% of its value in one day after reporting extremely poor earnings. The stock has continued to sell-off over a week later losing an additional 20%. The reason? IPSU is experiencing the worst of all operating squeezes: higher input costs (sugar) and the inability to raise prices to accommodate those costs. In this case, competitive pressures are to blame.

From the earnings report:

“Our inability to increase prices in the face of higher raw sugar costs because of competitive pressures from domestic and Mexican sources was the principal driver of the quarter’s disappointing results,” commented John Sheptor, president and CEO of Imperial Sugar. “Raw sugar purchased during the quarter was priced largely against the March and May futures contracts, which peaked near $40 per hundredweight prior to the USDA import quota announcement in early April. The subsequent decline in the raw sugar futures market which occurred after the quota announcement was only temporary and the raw market has rallied back to near the same level. Our raw sugar costs in the fourth fiscal quarter should see little relief, while sales prices thus far in the fourth quarter have only improved modestly.”

Higher manufacturing costs also hurt operating results in the previous quarter.

Note that last week, the International Sugar Organization (ISO) confirmed that no relief is in sight from higher sugar prices.

IPSU crashes after reporting very disappointing earnings

IPSU crashes after reporting very disappointing earnings


Source: Stockcharts.com


No relief coming from high sugar prices

Bloomberg reports that sugar prices are not coming down anytime soon. The International Sugar Organization says that current surpluses are not high enough to satisfy demands of importers for stockpiling. Production costs have also risen. See “Sugar to Stay High as Surplus Not Enough to Replenish Stockpiles, ISO Says.”


Blue Nile hit by high diamond and metal prices

Diamond prices have been going up, and Blue Nile is feeling the pinch. The online diamond retailer highlighted high diamond prices as well as high metal prices in its latest earnings report (August 4, 2011):

“While we delivered record second quarter sales and non-GAAP adjusted EBITDA, our results were impacted by rapidly rising diamond and metal prices amid a weakening consumer environment in the U.S. Despite these external headwinds, we achieved sales growth across all product categories, including double-digit sales growth in the non-engagement category.”


GE warns higher rare earth prices may impact pricing for lighting products

First Seagate warned that higher rare earth prices are squeezing margins on hard disks. Now, General Electric (GE) has added its own warnings about the soaring prices of rare earth elements (REEs).

In a briefing paper written to explain the situation, GE warns:

“We will do our best to manage these costs where we can, but rises on a similar scale to those seen in recent months will mean further significant price adjustments may be unavoidable.”

The brief paper provides a very general summary of the current rare earth market and describes GE’s current attempts to reduce the impact of high rare earth prices. I now strongly suspect that more and more industrial companies and manufacturers will flag rare earth prices as a potential and/or growing issue. Moreover, these warnings will keep rare earth prices in the foreground of the market’s “thinking” and potentially keep pushing rare earth stocks higher.

Disclosure: author is long several rare earth stocks, including MCP. Also long GE


Bacon prices expected to soon hit $6/pound

Retail bacon prices were $4.77 per pound in May and are expected to hit $6 per pound soon. In a somewhat tongue-in-cheek article, CNBC reports in “The Crisis We Should Be Panicking About: Bacon Prices“:

“The bacon community is outraged…I think they’ll make cutbacks other places — stop buying other things so they can afford bacon..Get some good tomatoes and lettuce and forget the other stuff…”

Bacon prices have increased because “…hog farmers have pared their herds due to high feed costs after corn prices hit a record near $8 a bushel last month.”


July 4th BBQs are more expensive this year

CNBC reports on food inflation in the context of the typical BBQ. If your typical BBQ is a cheeseburger, baked potato, and beer, you are paying 8.4% more this year than last year.

Other points from the video on year-over-year price changes:

Ground beef up 16.7%
Sirloin steak up 6.9%
Boneless chicken breast down 4.0%
American cheese up 3.6%
Head of lettuce up 14.9%
Tomatoes down 6.5%
White bread up 8.3%
Potatoes up 21.4%
Wine up 0.4%


Copper Prices Rebound Strongly

The strong rally in the stock market has included a strong rebound in copper prices. In “Copper Supply Squeeze Coming, Prices to Jump: Analyst“, CNBC notes that copper prices have reached a two-month high on the London Metal Exchange. Supplies are also likely to tighten as production from aging mines starts falling.

Copper prices hold firm

Copper prices hold firm


Source: Stockcharts.com

Disclosure: author owns FCX


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.