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Posted on 10/17/2021 7:04:10 AM PDT by blam
Rising consumer price inflation is not going away. This, of course, is counter to the “transitory” argument made by Federal Reserve Chairman Jerome Powell earlier this year.
Powell’s cohort, Atlanta Fed President Raphael Bostic, recently admitted inflation is not transitory. This admission comes with assurances the Fed will properly manage it. We have some reservations.
The effects of rising consumer prices range far and wide. For one, the pinch rising prices put on consumers is extraordinarily disruptive. It acts like a hefty tax…eroding family budgets that are already stretched. In this ongoing stagflation, personal income gains lag far behind rising consumer prices.
Industrial materials and consumer goods companies also feel the pinch. They can pass on some rising prices to consumers. They can also absorb through lower profit margins some short term price increases. But there are natural limits to what price increases can be absorbed and passed along.
When input costs, including raw material and labor, push the costs of the final manufactured goods above what they can readily be sold for the business motive breaks down. Halting operations makes the most business sense.
One industry feeling the pinch of rising natural gas prices is the fertilizer business. As we noted several weeks ago, several fertilizer plants in the UK have had to suspend operations because of soaring natural gas prices. Here in the US we’re not aware of any fertilizer producers suspending operations. But fertilizer prices are up, nonetheless.
In fact, the Green Markets North American Fertilizer Price Index recently soared to a record high, thus eclipsing the prior record set in 2008. Sky high fertilizer prices will further raise the cost of food production for farmers.
According to the Food and Agriculture Organization’s global food index, food prices are already at a decade high. Plus, when you factor in the grow season in North America doesn’t begin until late-March, the increased fertilizer input costs, could lead to persistent food inflation well into 2022.
But it’s not just food. Here’s one instructive example of how price inflation discombobulates the economy…
Someone Gets Squeezed
The price of cotton just surged to a 10-year high. Rising cotton prices translate into rising jean prices. Levi Strauss has already raised the price of its jeans, thus passing some of the price inflation to consumers.
Levi Strauss is also realigning its business to account for higher input costs. This includes aggressive negotiation with cotton suppliers and cutting out the middlemen. Here are several details:
“In its earnings call, Levi said it has already negotiated most of its product costs through the first half of next year, at very low-single-digit inflation. For the second half of the year, it expects to see a mid-single digit increase. And Levi said it plans to offset that hike with the pricing actions it’s already been taking.
“Levi has been shifting its business from a predominantly wholesale to a mixed base that has a growing share of direct-to-consumer sales. And with strong consumer demand and tightened inventories, it’s been able to sell more products at full price.”
As noted above, the price of cotton is at a 10-year high. Year to date it’s up 47 percent. If cotton accounts for 20 percent of the cost to make a pair of Levi’s jeans, and the company was able to negotiate product costs at a very low-single-digit inflation, then someone in the supply chain is getting severely squeezed.
How long will it be before whoever that is cries uncle, and reneges on its obligations?
For a cotton supplier, that would presumably be when the input costs – land, fertilizer, labor, and processing – are greater than their contracted cost with Levi.
In this respect, Levi may have a plan to account for higher cotton prices, for now. But will they really get a mid-single digit increase during the second half of 2022 as management anticipates?
How much more price inflation can they pass on to consumers?
Are You Prepared for the Mass Repricing of Goods and Services?
The answers to these and other related questions are being considered by management teams across all industries. The simple fact is when the price of raw materials and labor inflate, it becomes very difficult to plan operations and production. Hedging strategies may help manage for rapid, short-term price spikes, but they cannot ultimately prohibit a long-term repricing of materials.
In short, we believe a long-term repricing of materials, goods, and services, is now underway. Certainly, prices will continue to rise and fall to meet supply and demand dynamics. Yet this will take place in a range that is being repriced higher. It has happened before and will happen again…
In 1960, for example, a gallon of gas cost $0.31 per gallon. Similarly, in 1960 a gallon of milk cost $1.00 per gallon. Currently, the average price of gas and the average price of milk are $3.28 per gallon and $3.68 per gallon, respectively. That’s upwards of a 958 percent increase for gas and 268 percent increase for milk over the last 60 years.
Sure, the price of gas and milk could come down some from today’s prices. However, there’s no way they’ll ever drop back to 1960’s prices. They’ve been repriced higher for good.
Why? Are gas and milk somehow more valuable today than they were 60 years ago?
We surmise these essentials have generally the same utility value they always have. Yet the dollar has been greatly devalued. Moreover, this great devaluation is the consequence of rampant dollar debasement policies executed in tandem between the Fed and Congress.
The recent debt ceiling histrionics in Congress – and the elevation of the debt limit for what we believe is the 79th time since 1960 – are merely another milestone in the great dollar debasement saga.
Remember, price inflation starts with expansion of the money supply. These days the expansion of the money supply is conducted in tandem by the Federal Reserve and the Treasury. In short, the Treasury sells new debt to the Federal Reserve, which the Fed buys using credit created out of thin air.
Congress, through its debt ceiling increases, provides the Treasury with an unlimited tab. Congress then spends this limitless money into the economy via spending programs galore. As this new money flows through the economy, prices adjust higher, as the supply of money increases much faster than the supply of goods.
The point is, through policies of mass dollar debasement, we’ve now entered the next stage of the mass repricing of goods and services in the economy. The price of just about everything will adjust upward by several hundred percent – or much, much more – over the next decade.
Pre-pandemic prices are gone forever…
…and your savings, investments, retirement, purchasing power, and the quality of life that you’ve spent a life time planning and working for will be shredded.
Are you prepared?
> This admission comes with assurances the Fed will properly manage it. <
As the author noted, that assurance is fiction. At one time the Fed looked after the economy. Now the Fed is political. They’ll do what’s best for the Deep State.
Bad times are a’coming.
How can you prepare? Some items have already doubled and tripled in price. Has your boss compensated your paycheck for this? Mine hasn’t.
LOL.
I lived through the 70s.
Yup.
It’s unbelievable that they haven’t raised interest rates. It a dereliction of duty and is causing irreversible harm. But that the goal of this entire government, to create irreversible harm. There is no other way to describe what is happening.
*** I lived through the 70s. ***
I remember eating horse meat back then as it was cheaper than beef.
You’ve likely got family and friends in the same boat.
Get together and have skull sessions.
Assess your wants, needs. Figure out what you can do for yourselves and each other, how you can money. Share ideas, tips, knowledge.
You’re not in this alone.
You don’t have to go it alone. :-)
It’s funny. The older I get, the better I get at adapting. Geezerhood is good for something, eh? 😄
At HEB, the La Tienda tamales have gone up $3.00 a pkg since January. La Tienda is an HEB brand.
.. save money...possibly even make more.
they ran out of Genesee beer and there are no chicken wings..
damn you joe biden!!
I work with two young ladies, and last week I advised them to start filling their gas tanks when the level reaches half full.
They looked at me like I was crazy, so I asked them if they ever heard of the 72-73 oil embargo, the even/odd fuel buying, the lines, etc. LOL, they had no idea.
Yesterday, I bought strip steaks at Kroger. I was floored that the cost had risen to nearly $16 a pound. Looks like we're going to switch to chicken and lesser cuts of meat.
I love my Traeger grill, it will be a big help in preparing tasty food, even with lesser cuts. Looks like a good time to purchase a freezer, too.
We’ll wake up one morning and find out all freedom is gone and we are living in the New Green Deal
That would be the final nail in the coffin.
> It’s unbelievable that they haven’t raised interest rates. <
As we all know, federal spending is completely out of control. Any rise in interest rates would make it tougher for them to borrow and spend. We can’t have that!
I think the Deep State would actually prefer high inflation. Pay back borrowed money with inflated paper. What’s not to like?
Of course the average guy is gonna get pummeled. But the only person who cared about the average guy was Trump. And now he’s gone.
Unless they are planning to repudiate sovereign debt, they can’t raise interest rates. The debt service will eat the entire budget.
Inflation benefits so many power players that allowing fixed-income pensioners to go down the tubes is considered little more than a minor hiccup - especially since they have now learned how to evade any consequences at the ballot box.
Higher prices I can handle (not that I'd like it), but unavailability is another story.
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