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.
“…annual gains were registered in all categories, suggesting many manufacturers are taking advantage of the recent pick-up in growth to pass on at least some of their higher energy bills.
Core producer output price inflation, which strips out food, beverages, tobacco and petroleum products, rose by an annual 3.6 percent, its highest rate since February 2009.”
When including energy and food prices, producer prices soared twice as high as expectations to 0.9%. The annualized increase of 5.0% has not been this high since November, 2008.
The Bank of England is betting that inflationary pressures will subside later in the year given spare capacity in the economy. Skeptics are growing…
“Prices at the wholesale level rose across-the-board in November setting off a new debate over whether the recovering economy is starting to generate inflation pressures. Higher energy costs pushed the U.S. producer price index to surge 1.8% in November, the Labor Department reported Tuesday — a rate that far exceeded analysts’ expectations.”
The core PPI was up 0.5% — also higher than expected.
Most of the increase in overall PPI was due to higher energy costs. Since energy costs have declined in the last two weeks, don’t expect to see another big jump in producer prices next month.
The headline number for yesterday’s October 2009 Producer Price Index report gives us inflation worrywarts reason to cheer: a 0.6 percent decline in the price of finished goods, not including food and energy. Yay!
Dig a little deeper, however, and there is an ominous sign — namely, the PPI for service sector industries increased a whopping 0.5 percent from September ’09. Business Week’s chief economist, Michael Mandel, argues that the service sector PPI covers a broader swathe of the economy (“everything from telecommunications and web search portals to health care to banking to management consulting to fitness centers”) than core finished goods, and thus is a better measure of underlying inflation.
Although producer prices fell 0.6% in September, producers who rely heavily on commodities as inputs have experienced sharp pricing pressures for the past several months. Encore Wire Coporation (WIRE) provides one of many examples.
WIRE is a small producer of copper wiring ($486M market capitalization and net sales last quarter of $169M). The company described the squeeze it feels from higher copper prices during its conference call announcing third quarter earnings (click here for the complete transcript from Seeking Alpha):
“We’re tempted to lead the industry with several price increases during the quarter but met limited success…copper’s doubled since late last year and historically that’s been a fantastic situation for our industry. The change this time around on the copper climb has been there is a competitor that’s been very public with, they don’t agree with the passing on those cost, because they feel like the [market] won’t allow it.
Our approach to that is you pass it on and it is what it is regardless of the demand. It’s very transparent for contractors and distributors alike to see that copper is up $0.10 or down $0.05 or whatever the volatility would lead to and from my 20 years…copper is the deciding factor on a price increase or actually price decreases as well. You can have PVC, you can freight, you can nylon, you can have other cost influences but until copper trends one way or the other, the price increases typically fail.”
In other words, when construction activity picks up again and/or becomes relatively more robust, there is plenty of inflation waiting in the wings for commodity-based products like copper wiring. That inflation will likely translate quickly into higher costs for construction across the board.
Today brought welcome news for those of us who worry about inflation. The U.S. Labor Department reported that the Producer Price Index (PPI) fell 0.6 percent in September. Core producer prices, which exclude food and energy costs, declined by 0.1 percent.
Here at Inflation Watch, we’ve reported on evidence of rising prices at the consumer level (see, e.g., our posts on health insurance, college tuition, used cars, new cars, tires, gasoline, air fares, pharmaceuticals, parking, utilities, and, housing). But at the wholesale level inflation apparently remains subdued. For the time being, anyway. With crude oil prices marching higher this month, it is doubtful that producer prices will continue to fall for long.
This observer cited today’s PPI report as evidence that the U.S. economy is experiencing massive, prolonged deflation. This analyst hints darkly that the U.S. government may soon start burning down farmer’s fields and shooting their livestock in order to prevent further deflation. Or something.
The response on Wall Street, by strong contrast, was calm. The iShares Barclays 20+ Year Treasury Bond Exchange Traded Fund (TLT) rose by just 0.5 percent on the day–a decent showing, but hardly evidence of a sea change in inflationary expectations.
Update (10/21/09 11:33 am eastern time): At this moment, TLT is trading down 0.9 percent today, erasing all of yesterday’s gain and then some. Clearly, yesterday’s PPI report did little to comfort bond traders’ worries about inflation.