[ire]

I hope this guy isn't right

http://www.businessweek.com/bwdaily/dnflash/content/aug2008/db20080815_021990.htm?chan=top+news_top+news+index_dialogue+with+readers

Bracing for Inflation
Despite the recent softening of oil prices, the U.S. could be looking at double-digit inflation as early as 2009
by John K. Castle

Growing evidence suggests American consumers, businesspeople, and political leaders should all be bracing for double-digit inflation, probably as early as 2009.

The relative price stability of the past 15 years is giving way to worsening inflation, despite the recent softening of oil prices. The Consumer Price Index for all items shows the inflation rate averaged 2.6% a year from 1992 through 2007 but has doubled since January, reaching an annual rate of 5.6% in July (BusinessWeek.com, 8/14/08). By next year, the monthly figure could hit double digits, and the inflation rate for 2009 overall could triple 2007's 2.85%.

I say this not only because I have looked at a broad range of statistics that point in this direction. I also run a private equity investment firm that owns companies in a number of industries—including restaurants, the manufacture of gardening tools, oil and gas exploration services, and distribution of entertainment products such as books and videos—that are already being forced to pass price increases on to the consumer.

The skyrocketing price of oil is obviously a central element in the accelerating price spiral. But a sea change in China's role (BusinessWeek, 6/19/08) is beginning to have a huge impact as well.
Increasing Commodities Pricing

Anyone who hasn't been living in a cave for the past year knows that oil prices have soared and pushed up the prices of gasoline, diesel fuel, and heating oil. Largely hidden from view, however, have been steep and continuing price increases across the whole spectrum of commodities.

Oil almost doubled in price, from $78.21 in July 2007 for a barrel of benchmark crude, to $145, where it peaked before dipping below $120. But from a longer perspective, oil sold for about $30 a barrel during 2003 and much of 2004. Thus it has actually quadrupled in five years. Coal, traditionally volatile, sold for about $30 a ton during 2003, peaked briefly at $63 in 2004, and went for $45.25 at the end of July 2007. A year later it hit $139.50 before slipping back a bit. It has tripled in 12 months.

Copper, another basic commodity, went from 82¢ a pound in July 2003 to $1.14 a year later, and to $3.72 by the end of last month. That's an increase of 350% over five years. The price of steel has climbed from under $240 a ton for hot-rolled steel coil throughout most of 2003 to $1,125 a ton last month, quadrupling in five years.

Grains have also soared in price (BusinessWeek.com, 7/18/08). U.S. corn prices jumped from $3.01 a bushel in July 2007 to $5.37 one year later. Wheat doubled from $3.05 a bushel in July 2006 to $6.02 last month. A Midwestern bakery owned by one of our portfolio companies turns out 13 million pies a year. The cost of ingredients of a standard pie jumped 100%, from $1.20 a year ago to $2.40 today.

In every sector, cost increases are so large and pervasive that producers who might once have tried to absorb or work around them are passing them on to customers as fast as they can. Dow Chemical (DOW) recently announced successive price increases of 20% and 25%, plus freight surcharges, saying energy and feedstock costs had risen fourfold in five years.
China's Role

With commodity costs rising for so long, why are we feeling the impact so suddenly?

The answer is that China can no longer bail us out with low-cost manufacturing. For years, American manufacturers and retailers offset rising costs by sourcing more products from China, where they could be made cheaply. That kept prices down for American consumers and also restrained pressures on wages, abetting price stability. But now costs are rising quickly in China, too (BusinessWeek.com, 8/12/08).

The Chinese government, under pressure from the U.S., let its currency float upward by 21% against the dollar since depegging it in July 2005. It also increased its value-added tax by 11%, and removed rebates of the tax for most exporters. New labor laws, coupled with a tightening market for skilled workers, have pushed up labor costs by about 50% over the last three years. Meanwhile, Chinese producer prices rose by 10% in July, the fastest rate of increase since 1996. As a result, Chinese producers are demanding—and getting—price increases of 20% to 25% on goods they make and sell to U.S. customers.

Without the Chinese life preserver, prices at the big-box American retailers are likely to be soaring in the near future, and Chinese manufactured parts and components that go into U.S. cars and appliances are likely to experience similar gains.
Admitting We Have a Problem

Most Americans will have to tighten their belts and accept lower living standards unless this inflationary spiral can be stopped. There will be pain—higher prices and a weaker economy, resulting in fewer jobs. Meanwhile, millions of Americans who are already feeling poorer because of falling home values and a soft economy will be further pinched by higher prices for heating oil, groceries, clothing, autos and appliances. Labor is unlikely to remain so quiescent, particularly as the expectation of inflation becomes clear.

The federal government and the Federal Reserve will be under pressure to take tough and politically painful steps to curb this inflation, including strengthening the dollar, raising interest rates, and tightening credit. But the Fed's ability to raise rates is constrained—it needs to keep rates low to manage the mortgage-backed bond mess.

The first step in solving the problem is to recognize that we have one—and it is serious. No American housewife has any doubts about that. Our policymakers shouldn't, either.

 

[dante]

Meh. Real inflation can only exist with ever-increasing salaries (see 1970s) so that people can afford to spend more, and more, and more on items. Remember the central mantra to economics, as prices go up, consumption goes down. 1970s inflation skyrocketed because the *relative* purchasing power stayed the same (salaries increased in order to "cope" with rising inflation). Right now, salaries aren't improving and furthermore, people can't borrow anymore, so they can only realistically spend money that they are bringing in. If the prices go up, and the salaries stay the same, people will buy less. Food and energy are staples, so as people spend more on them they'll spend less on discretionary items. Fewer people buying them will act to hold prices down, as you can only sell an item for what people are willing to spend on it.

just my thoughts on it, this website talks about inflation/deflation quite a bit and seems pretty reasonable in their justifications....

http://www.minyanville.com/articles/stagflation-macleod-oil-gold-PPI-fannie/index/a/18591

 

[Silver]

Meh. Real inflation can only exist with ever-increasing salaries (see 1970s) so that people can afford to spend more, and more, and more on items. Remember the central mantra to economics, as prices go up, consumption goes down. 1970s inflation skyrocketed because the *relative* purchasing power stayed the same (salaries increased in order to "cope" with rising inflation). Right now, salaries aren't improving and furthermore, people can't borrow anymore, so they can only realistically spend money that they are bringing in. If the prices go up, and the salaries stay the same, people will buy less. Food and energy are staples, so as people spend more on them they'll spend less on discretionary items. Fewer people buying them will act to hold prices down, as you can only sell an item for what people are willing to spend on it.

just my thoughts on it, this website talks about inflation/deflation quite a bit and seems pretty reasonable in their justifications....

http://www.minyanville.com/articles/stagflation-macleod-oil-gold-PPI-fannie/index/a/18591

Thank God we have an economy that isn't driven by consumer spending.

 

[dante]

Thank God we have an economy that isn't driven by consumer spending.

 

[dan-o]

Fewer people buying them will act to hold prices down, as you can only sell an item for what people are willing to spend on it.

Maybe for goods/services on the extreme end of the 'discretionary' scale, but to think that consumers drive the sales price is naive. The cost of everything is going up and while you can buy less, you will pay more for what you do buy.

edit: Examples of this abound in everyday items. You may be paying the same for that toothpaste/ice cream/'pint' of beer but the actual quantity you're receiving has been reduced to offset increased costs to the manufacturer.

 

[dante]

Maybe for goods/services on the extreme end of the 'discretionary' scale, but to think that consumers drive the sales price is naive. The cost of everything is going up and while you can buy less, you will pay more for what you do buy.

edit: Examples of this abound in everyday items. You may be paying the same for that toothpaste/ice cream/'pint' of beer but the actual quantity you're receiving has been reduced to offset increased costs to the manufacturer.

last I checked you could get a pretty good deal on a large SUV or full-size truck right about now... supply outstrips demand, prices fall.

as for your edit/example, toothpaste (and to a certain extent ice cream and beer) are consumer staples. regardless of whether you can afford a new car, you'll always figure out how to buy toothpaste. therefore, even if supply shrinks (either on finished goods or raw materials needed to make toothpaste), demand stays the same and prices rise. very similar to gasoline, which has seen price increases of 100% in the past couple years, and driving has gone down by 3%. however, large LCD tvs and other high-end items haven't increased anywhere near as much, and are pretty much the same price as they were last year (or cheaper).

http://www.minyanville.com/articles/stagflation-bac-PPI-Goods-depew-five/index/a/18573

In today's PPI report, the Finished Goods PPI was up 1.2%. The Intermediate Goods PPI was up 2.7%. The Crude Goods PPI was up 4.2%. What does this mean? Think about it for a moment.

cost of goods is going up far faster than companies can pass them on. reduced consumer demand holding prices lower than the would have normally gone up, and squeezing the companies in the middle. some companies will go out of business (see Dave and Barry's, which worked on extremely tight profit margins and filed for chapter 11 about a month ago), reducing supply, and enabling the remaining companies to raise prices. with no Dave and Barry's holding the price down on clothes, Kohls can charge a little (lot) more for clothes, and might survive. prices end up rising, but it's due to reduced supply (D&B's going bankrupt) rather than the direct cost of raw materials.

 

[ohio]

last I checked you could get a pretty good deal on a large SUV or full-size truck right about now... supply outstrips demand, prices fall.

What you're describing is only true in the case of temporary oversupply (liquidation) or above marginal cost. Profit margins are being squeezed and as more manufacturers hit their marginal cost, they will drop out rather than sell below cost. Manufacturers have 2 options in the face of reduced consumer demand: lower prices OR lower supply. With materials driving marginal costs up, you will see lower supply (production) and static or increasing pricing on many goods. Lower production ain't exactly good for our economy either.

 

[3D.]

Meh. Fewer people buying them will act to hold prices down,

not that simple... or, maybe in a world where America is the only consumer and actually manufactures it’s own products.

If it worked like you say, there wouldn’t be a 70% starving population in Nigeria.

 

[3D.]

when the money is feeble, you just can't buy

http://www.prudentbear.com/index.php/commentary/guestcommentary?art_id=10098

 

[dante]

What you're describing is only true in the case of temporary oversupply (liquidation) or above marginal cost. Profit margins are being squeezed and as more manufacturers hit their marginal cost, they will drop out rather than sell below cost. Manufacturers have 2 options in the face of reduced consumer demand: lower prices OR lower supply. With materials driving marginal costs up, you will see lower supply (production) and static or increasing pricing on many goods. Lower production ain't exactly good for our economy either.

Never said it was... Similar to the link posted by 3D., I think that we're over-leveraged, in obscene levels of debt, and that the HELOC-fueled boom of the '00s is probably coming to an end. I just don't think that we're entering into an era of runaway inflation. Yes, there's going to be some affect on products that rely on a finite amount of raw materials (oil and food), as well as how fuel costs ripple throughout the economy but unless the gov't does something stupid like purposely inflate the dollar (additional rate cuts while everone else is raising, which isn't completely out of the picture), I don't think we're going to see runaway inflation. The alternative might be worse, though...

when the money is feeble, you just can't buy

http://www.prudentbear.com/index.php/commentary/guestcommentary?art_id=10098

when credit dries up, you can't spend what you don't have. So far, there was a slight blip in spending from the stimulus checks (gah!!!!), but it will be "interesting" to see what happens now...

 

[ire]

even if inflation slows Americans, as a whole, will have to accept a lower standard of living. People won't be able to buy three cappuccinos a day and eat out every night. The thing that really pisses me off about our current inflation, is that it is partly rooted in the low interest rates; those of us that were responsible, didn't go into debt, and saved are being screwed because the Fed must bail out irresponsible banks/investors

 

[dante]

even if inflation slows Americans, as a whole, will have to accept a lower standard of living. People won't be able to buy three cappuccinos a day and eat out every night. The thing that really pisses me off about our current inflation, is that it is partly rooted in the low interest rates; those of us that were responsible, didn't go into debt, and saved are being screwed because the Fed must bail out irresponsible banks/investors

my mom always said "life's not fair", lol. but yes, I completely agree that those of us who are trying to live within our means, not overstretch, and to keep saving are going to get (getting?) screwed by low interest rates, easy credit, and the rest of america sucked into the "keeping up with the jones'" mentality. however, there's really not much that complaining about the situation is going to do, so keep your saving's up, your head down, and stay diversified. inflation only *really* hurts from a savings perspective if you're sitting in bank accounts or money market funds making 2%. at the very least hold some good dividend paying stocks (you can pick up stellar companies paying 4%+), TIPS (although I think that the way the gov't calculates inflation is FUBAR'd, and so you're not *really* beating inflation), and diversified mutual funds as the market goes down, and you'll emerge from the '00s in a much, MUCH better position than everyone else. yes, I personally think that the market has farther to go down, but if you're diversified, it just means that you're buying into a down market. buy good companies (or mutual funds/indices to spread the risk) and just wait it out.



or buy a n8 mansion and go out in a blaze of debt-induced glory.