Even manufacturers, after months of crushed commodities prices, experience inflation and are able to pass it on. Stimulus money the government and the Fed have thrown around by the trillions.
By Wolf Richter for WOLF STREET.
It seems somewhat counter-intuitive in this crisis that companies in the services and non-manufacturing sectors – which dominate the US economy – would report higher input prices and higher sales prices. And there are now also smaller pricing pressures cropping up in the manufacturing sector.
“Inflationary pressure returned as both input prices and output charges rose for the first time since February, with both increasing at solid rates,” reported IHS Markit this morning in its Services Purchasing Managers Index (PMI) for June.
PMIs are based on responses from executives about their own companies – if particular activities are higher, unchanged, or lower in the current month than they’d been in the prior month. No quantitative measures or dollar amounts are involved.
“Inflationary pressures intensified for the first time since February at the end of the second quarter, as both input prices and output charges increased,” IHS Markit added in its Services PMI.
“Companies registered a solid rise in cost burdens as some suppliers hiked prices following the resumption of operations at service providers. The rate of input price inflation was the fastest since February 2019,” it said.
“In response to higher input costs, firms partially passed on higher supplier prices to clients through greater selling prices. The increase was solid overall and the sharpest for 16 months,” it said.
Even more inflation pressures cropped up this morning in the Institute of Supply Management’s Non-Manufacturing ISM Report On Business.
Prices that companies paid in June increased at a “faster” rate than they’d increased in May, the third month in a row of month-to-month price increases. In these PMIs, a value over 50 means an increase in the current month from the prior month; a higher value means a sharper increase.
Of the executives in the survey, 34.6% said that prices at their companies in June moved higher and 56.8% said prices didn’t change. Only 8.6% said that prices fell. This cause the PMI’s price index to jumped to 62.3 in June from 55.6 in May, the largest increase in points since August 2012:
Of the 17 industries in the non-manufacturing PMI, 14 reported an increase in prices that they had paid in June, listed in order:
- Accommodation & Food Services;
- Real Estate, Rental & Leasing;
- Health Care & Social Assistance;
- Public Administration;
- Wholesale Trade;
- Professional, Scientific & Technical Services;
- Other Services;
- Management of Companies & Support Services;
- Transportation & Warehousing;
- Agriculture, Forestry, Fishing & Hunting;
- Educational Services;
- Finance & Insurance;
And three non-manufacturing industries reported a decrease in prices that they had paid:
- Retail Trade;
- Mining (includes oil & gas extraction);
The services industry accounts for about 70% of the economy. And that’s where price pressures will be felt the most, and will be, or are already being passed on to consumers.
But price pressures are also returning in manufacturing.
“Inflationary pressures picked up, as both input costs and output charges rose for the first time in the second quarter,” IHS Markit reported on June 1 in its manufacturing PMI.
It said that “cost burdens rose in June as suppliers hiked their prices due to logistical issues and higher shipping costs.” And “firms partially passed on greater input prices to customers through higher selling prices.”
For these manufacturers, the increase in input prices “was only marginal,” and “the increase in output charges was only slight as firm sought to remain competitive under challenging demand conditions.”
The Manufacturing ISM Report On Business by the Institute of Supply Management also pointed at price increases in the manufacturing sector, after sharp price declines in prior months as some commodities prices had collapsed. Its manufacturing price index jumped over 10 points to 51.3 in June, “indicating raw materials prices increased after four consecutive months of declines.”
The price increases in the services and non-manufacturing sectors, and to a lesser extent the nascent price increases in the manufacturing sector, are another warning that all this stimulus money that the government and the Fed have thrown around by the trillions of dollars in every direction – not just at asset prices – is starting to move prices that companies in the services sector, and to a lesser extent in the manufacturing sector, pay and that they’re able to pass on via higher prices they charge.
One Purchasing Managers Index said services fell further in June, but more slowly; the other said activity started climbing out of the hole. Both agree: Jobs dropped further. Read… A Word About that Historic Bounce in US Services PMIs: No, the Service Sector Didn’t Hit New Highs. It Stopped Plunging
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I just wanted to be the first to comment. I have noticed prices are higher at Amazon and Costco!
forgot wally mart and so many other places
amazon has bot that see’s you purchased item before and adds 19% to price when you bring it up again
this has been happening for years
10-4, JS, ya got their main, or one of them, profit enablers nailed…
Other than that, “HELLO” to the parts of WE the PEEDONs, I really do not have any definite idea as to how to raise up ALL folks to do their best to actually make/produce SOME THING OF VALUE right in their own current space,,,, and make that thing the best thing that YOU know,,, U KNO is very much needed right now in your hood…
Pretty much other than that we can all do right now in our current space, with no ”spacing out” to go to work for ”THE man by any and all names as per the continuing clearly failing fully , eventually one way or another false concept of ”central authority figure”
After, and only after WE THE PEOLPEs of all and every nation/state/city/any group get over that concept left over from the days when our owners could come and rape the bride the night she was married, etc., etc., will we be awake, able, and ready to go on to the next phase of our ???
Thanks Wolf, for all you do, and if this too much for ya,,, please, first, edit, and if still too much, LMK if I can help interpret, per Petunia…
Sorry, after review, some of the above is clearly abscure, as would be expected from one almost always trying to escalate the investigation for the last several decades after being trained in the arts and sciences of the approve, ( and otherwise,) applications at what was, at the time, considered the best ”public” university in USA, now 2nd from what I have read recently.
In any case, long or short, I appreciate all on here, doing their best, as am I, to report both local and recent, and long time and global, and very clear opinions based as much as possible on on the reports Wolf SO clearly presents…
Thank U ALL!
Wish there was more info.
Fuel costs are down. So what are the main drivers?
Trade disputes? Workers out being sick? Shutting down the entire economy?
“It said that “cost burdens rose in June as suppliers hiked their prices due to logistical issues and higher shipping costs.”
Trillions of dollars in stimulus from the government and the Fed that companies and consumers received to spend?\
Also this is a supply shock — from the lockdowns as well as from cutting capacity: airlines, shipping, manufacturing, meat packers, etc.
Has your inflation flag, being reflected into HEADLINE inflation, which confer the trend or there is a lag?
How can they increase prices when 30 M are out of work? Is the demand shock lagging and may show up, once the PPP program ends?
Trillions and trillions of stimulus handed to consumers, businesses, and governments that are all going to spend it.
A change in the type of demand. For example less sale restaurant portions and ore household portions. So a warehouse filled with restaurant portions. Normally this would lead to a lowering of the price to clear the warehouse but now manufacturers close the line and keep the price up while extra lines are not opened for stuff that sells more because after covid demand will return to normal
in maine you can get whole lobster for $1
in Arizona stores want $5 for 3.5 oz tail – keep it
in Idaho – Potatoes are FREE
in Arizona $1 lb
see them here
If the government does not provide more stimulus payments and allows the extra weekly unemployment benefits to expire then I would assume this mild inflation is mostly transitory. After all commodities are down which should mean that on the aggregate less is being consumed. Companies may be facing more demand than they anticipated since people still have money to spend courtesy of the govt, but since they’ve laid off many workers they are scrambling to get more done with less. It could be something as simple as more overtime pay for the remaining employees. Perhaps businesses are dealing with inefficiencies of being understaffed to meet current demand (as laidoff employees are refusing to come back for the time being) and so they are slightly raising prices to compensate. Or, they are raising process just because they can and the willing to pay consumers are there.
30 million on unemployment. End of July is around the corner. Millions collecting an extra $2400 a month LMAO you think inflation will be transitory? Sure!! Obviously! But the fiscal cliff will turn into a black hole. The US economy is f’d!
The stock market isn’t really going up as much as it’s pricing in inflation and your dollars getting more worthless.
The dollar is currently doing very well against other currencies, so that’s not it. If the US Dollar goes though, all the fiat currencies will probably collapse. All the world’s stock markets keep, becoming, vastly overvalued.
“The dollar is currently doing very well against other currencies, so that’s not it.”
Never mind what it’s doing against other paper. What it’s doing against real assets and goods and services is what matters. I see lot’s of deflationists in denial here. Helicopter money + supply disruptions will do it.
Amen. Also, as to the hike in prices, remember that many services are essential: e.g., you need a certain amount of electricity, gasoline, car repairs, etc. They are not discretionary, luxury services. Prices on those essential services can be raised and the demand for them will not decrease significantly.
I am surprised at the increase in accommodation and food services (which would include restaurants) and real estate. While there will be a base demand for food service, e.g., from the essential workers and workers in areas unaffected by this pandemic, I would suspect that many of them went down in volume. Maybe, those categories include leasing of real estate and provision of food for entities that still operate or their customers, e.g., Amazon and food delivery services.
Prices are going up in many items, but the demand will go down sooner or later for non-essential services, particularly given the exploding clusters. The fact is that our earnings are effectively being watered down with the printing of more dollars by the banksters’ Fed and that upcoming decline will be realized economically when the supply resumes some normal level and the demand approaches the prior level. Inflation from money printing is not instantaneous.
Remember, since spending has been suppressed by the pandemic, fewer dollars are chasing fewer services and goods. (The changes will vary for each service/good.)
After the pandemic, we will have a far greater supply of dollars and probably the same number of goods: of course, some countries may be desperate to sell to us to get dollars to pay their debts, so there may be bargains, e.g., for coffee. A lot of the dollar-denominated debts will have gone into default.
Many debtors will think twice about borrowing in dollars again, if they can avoid it. When the US economy suffered a significant reduction, many foreign debtors that depended on selling to the US lost the ability to earn dollars to pay their debts.
Overall, more inflation is definitely coming. If our leaders were visionary, since so many of the wealthier countries are practicing mercantilism, we should aim to create a trading block. Within that block, we would trade with few tariffs and we would have captive markets to which we can provide services and goods.
Outside that block, which could be quite large, because the US has many friends if we but cultivate them, we can impose tariffs, fees charged for each ship to inspect every item from the other countries, etc. Of course, we would have to give up ultra cheap phones and TVs, etc., until other countries could ramp up their production.
Nevertheless, as the British Empire established in its history, creation of such trading blocks works and (while the British Empire was beneficial to England and not its other members, particularly India), can be beneficial to its members. E.g., Australia and Canada benefited, because there was no prejudice and they were not mistreated. Since they view themselves as part of the UK’s commonwealth, they have not been its enemies but its best friends.
Technology is advancing rapidly. Western countries have the best track record for developing it. If we were to form a trading block with Japan, the UK and its allied countries, liberal Asian countries, Latin America, and the EU or selected members, we could leave communist China in the dust. If we offer them free trade or high tariffs, I think even Germany would abandon its flirtation with China and join our block.
Very good analysis and suggestions of doable remedies/balances.
We can hope that at least some of our owners will recognize the long term benefits to them selves and their families and at least begin to consider, contemplate, and do the math..
Mostly I agree, but, there are a couple things to note.
This is a big one, is doesn’t matter how many dollars there are, it matters how many dollars are actually moving in an economy. Think “money velocity”, this is why inflation hasn’t hit yet. Inflation isn’t why prices keep rising so much relative to wages, it’s because of monopolistic competition and sometimes, because, of increased global demand for resources. Poor labor economics and immigration keeps wages down, because, of outsourcing and automaton wages are low. Shrinking the amount of hours an average person works in a year, forcing jobs back, and a higher income tax on the top 10% are the only ways to fix this. Among many government spending changes. If this was done everyone would be better off, including top 10%.
As for whether people will go for dollar denominated debt is more complicated, the dollar has held value for a long time “always slowly shrinking in value, but, interest rates can account for this, somewhat. If a country doesn’t have a trustworthy currency, they will have to borrow with something, the issue with using gold or foreign hard currencies in this respect is that the value of gold can jump both up and down alot, this is a much bigger problem in certain situations than you think, a slowly devaluing currency has some merits.
Also, it’s important to note that America will eventually just have to automate most outsourced jobs, instead of moving them around. Over time, the cost of automating most jobs, especially, outsourced jobs will plummet. While tv’s are ridiculously cheap, most electronics aren’t and with the huge margins on phones the cost wouldn’t necessarily change. In the past pre iPhone X the base iPhone was always designed to cost about 220 in components and sell for 650, after all other expenses Apple’s profit margin was 40%. It was usually estimated it would cost a little over $50 extra to make an iPhone in America, but, once enough electronics moved here, the extra amount would probably drop. Various electronics prices might rise, but, a lot less than you are led to believe, and this extra cost would go down over time, and the better jobs would raise America up.
Because, in the past foreign labor was so cheap, investing in automaton was less desirable. But, because, the wages and problems keeps rising with Asia and automaton becoming easier over time, this will change.
This assumes that the stock market isa good predictor of the future. It isn’t
“History confirms that stocks make the wrong call on future recessions almost as often as they prove a bellwether. “
I don’t really believe much in one year PE ratios, but a lot of people use it. Trailing twelve months earnings falling through $100 for SP500. That means PE is 31.5 and increasing as earnings fall. Kind of scary that fiscal debt plus Fed balance sheet rocketing past $30 trillion. No wonder gold is making new highs.
1/2 gallon “Great Value” bleach in Walmart used to be $1.00 last year…now it’s $2.94. Go figure…..
The bleach is probably a demand issue. You’re lucky to find bleach at all due to the COVID concerns.
That is the mindset that encourages price hikes in various sectors.
Consumers are fearful that there will be shortages and react accordingly. Toilet paper, bottled water, disinfectants, canned and bottled goods, anything that give the illusion of safety is being priced at a premium.
After 3 months of epidemic does anyone really believe that bottled water and paper products are in short supply?
We know someone who works at a household paper products factory. The factory is running shifts producing products since the shortages began. Before covid the factory had laid off workers.
The shelf was loaded with jugs of it. No one was biting at that price when I was in the store.
All sanitizing products are overpriced right now. The local gas stations have started stocking tiny “think vacation sized bottles” for $3 each (maybe it was $5, will have to check next time). Previously, I don’t think they stocked any.
Toilet paper hasn’t gone up in price though (that I have noticed), despite having been previously out of stock and still low in stock. There must be enough different suppliers that competition keeps the prices down.
With hand sanitizer, the reported issue is creating the pump bottles not the liquid. Im not sure why, no-one seemed to just find a different bottle to stick it in “pump or not” (would have still sold). But, it’s back in stock “with pump” at 5x original price.
The pump makes sure to dispense more than you actually need so you use it all faster and have to buy more.
Cleaning products of all types are in short supply. This extends to cosmetic cleansers for the face and body as well. These products were always available at discount in a variety of stores, but no longer. It seems the clean freaks have stocked up for the next decade. I only stocked up for the summer.
Bleach, bottled water, and toilet paper have all reappeared. Not much call for increased use of those
Isopropyl alcohol has not reappeared, except at inflated prices (best price I’ve found – walmart sells it online – pack of 2 – 32fl oz 70% bottles for $5 – double what they used to be, I order this pack every time I have an online walmart order over $25 to avoid the $5 shipping)
I use the isopropyl alcohol everyday, keep a bottle on my desk at work, and take it home at night so it doesn’t get stolen. Every day starts with me wiping down the entire desk, keyboard, mouse, phone, chair.
I sanitize my hands with this alcohol regularly during the day, since I hate the goo left behind by hand sanitizers and avoid them. At home, I recycle my collection of N95 masks by spraying them with a mist of this alcohol.
I now go through one+ quart of isopropyl alcohol PER MONTH. In the B.C (Before COVID) era one quart bottle would last – maybe 1-2 years? So my personal use of isopropyl alcohol has gone up 10-20 fold, minimum
Stagflation – stagflation or recession-inflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment” source – wikipedia
Equal to the sum of the inflation rate and the unemployment rate.
Made popular during the Carter Administration.
Got up to about 21 near the end of his term.
@2banana, tis true, but for comparison purposes the measuring of unemployment and inflation were relatively honest back then.
Yeah, stagflation, here we come. And I can’t quite see by what means inflation gets contained if it gets out of the box now, in a low interest rate world drowning in debt. Evetually it will have to either become a world drowning in inflation or a high interest rate world drowning in bankruptcies.
I imagine central banks will try to continue their increasingly precarious balancing act instead, and they will therefore try to avoid further helicopter money to the masses and go back to more of the ‘old school’ QE, where new liquidity doesn’t take a detour via the hoi polloi, who go out and spend it on consumer goods on its way up the ladder to the end beneficiaries, but once again instead goes straight to recipients who will park it directly in financial markets.
America is not the world. Expect a decoupling. Inflation also helps with restoring proper pricing for massively overprices properties without to much economic dislocation.
And I’m not American. But we’re all living under the Damocles sword of massive debts accumulated because nobody can accept contraction and sustainability as an alternative. For decades we’ve been using debt as an unsustainable ersatz to offset our inevitably declining oil based prosperity, and the day of reckoning for our total refusal to accept the impossibility of eternal exponential growth appears to be getting quite close.
And inflation is an extremely disruptive force when unleashed, as we have witnessed across many times and places that have experienced it. And we’ve bottled up so much inflation in the prices of stuff like financial assets and property through grand promises to future recipients of pensions and the like that cannot be fulfilled in real terms, that I fail to see any way of getting on top of the debt without enduring prolonged and widespread suffering and rebalancing towards a level of greater average poverty.
We either make fixed income recipents destitute through inflation or we bankrupt the owners of businesses, financial assets and property. Central banks and governments have shown us their propensity to safeguard wealth over income, so I too expect that the inflation route will be chosen when things eventually come to a head. But I also expect social strife to continue to increase as a result.
Stephanie Kelton has found herself at the center of a blossoming debate over a provocative economic idea known as Modern Monetary Theory (often called MMT) — a theory that seeks to flip much conventional economic wisdom on its head. As one of the foremost advocates and articulators of the theory, she has just come out with a new book called “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.”
Find the link to the article at alternet.org, or go to the July 1 entry at Raúl Ilargi Meijer website.
Bottom line, govt prints, and prints, unless inflation goes over 2%…
Let’s face it. Inflation has averaged close enough to 2% that economists should be happy. Most just want the government to spend more.
re statement: Inflationary pressures picked up, as both input costs and output charges rose for the first time in the second quarter,” IHS Markit reported on June 1 in its manufacturing PMI.
Wait until the threatened aluminum tariffs are imposed on Canadian product. This will affect everything from soft drink cans to automobiles.
Then Meng Wanzhou will be proved innocent and return to China.
If only we could put soft drinks into glass or plastic containers instead.
And, fyi, no one is buying new cars right now.
They’re buying new cars, just fewer of them. But also automakers stopped making them. So this is the mix of supply shock and demand shock, combined with mega-tons of liquidity.
Cash is most definitely not king today.
I received a reopening announcement from my salon (Santa Rosa, CA) with this message:
“Due to new customer distancing protocol and necessary equipment (masks, etc) a surcharge of 10% will be added to total bill”.
Up until quite recently, there used to be a 3 percent federal excise tax on all phone bills.
It was conceived and instituted to pay for the Spanish American War.
A lady I know said she was charged a “Covid surcharge” at her regular hairdresser. She also said she will shop for a new hairdresser.
I’ve been surprisingly happy with my free YouTube haircut. Not sure I need to go back to those $100 salon cuts.
Me too. GF has been cutting my hair and it looks great. She leaves it a little longer on top. She watched a Utube video and then started cutting my hair. :) No more haircuts.
When my wife and I first got married 43 years ago she was never happy with the results when I got a haircut. She would always fix my haircut to suit herself. After about a year of this, we eliminated the middleman and she’s been cutting my hair ever since.
As I’ve gotten older, she says the job keeps getting easier since there seems to be less hair to cut.
$10 hat. Done.
I think they’re just trying to make up for revenue lost during ‘lockdowns.’ I threw a large tip at my haircutter when I could finally get my 17-year-old self a cut.
I remember back in the days of the foot and mouth disease outbreak in the UK that certain hotels and restaurants charged supplements on fixed price menus for meat, being as it was supposedly in short supply.
Don’t think that it was something that lasted very long though.
I can understand salons charging for PPE that has to be supplied, even the thinking behind upping costs to cover the shortfall in the amount of clients that can be serviced, but it’s a risky move that can push custom away, and once you’ve lost it, it doesn’t come back.
I bought an Evencut hair cutting razor months ago. I gave myself a haircut. Avoided the barbershop. Saved $15 a haircut. It was $13 a haircut a year ago. The tool is already paid for in what I saved. I miss the barbershop fellowship.
44 Florida hospitals reported no spare ICU capacity. Florida eviction forbearance has been extended.
I think of a 10% surcharge as Hazard Pay. That’s cheap considering each stylist could die with any haircut.
They could have just raised prices 10% instead of the sign, but I’m sure the sign is in protest for not being able to open completely.
My salon went cashless, requiring a credit card number on file, which is ridiculous for a haircut. They also raised the price of a haircut and added a $5 fee for the extra cleanups. I stopped going because I can’t pay cash.
The cashless push is a very discriminatory practice which deprives the unbanked poor of services they would ordinarily pay for in cash. I see a new wave of unbanked people coming out of this plandemic, businesses going cashless will suffer, when everybody has bad credit.
“I see a new wave of unbanked people coming out of this plandemic …”
Gee, too bad there’s absolutely no solution to this problem like, say, allowing post offices to serve as small-transaction banks. Think of the (bankers’) children, people!
I liked the idea of postal banking until I moved to my current area. After numerous complaints it has gotten better, but still has occasional problems, which I never experienced in other states.
Samsung reported a 22% rise in profits, but this includes a one time gain I think.
But still a pretty good showing.
Best depression ever. Seems like everyone’s spending.
Yet 10Y TIPS near all time lows currently signalling that inflationary shocks (like those that have come before) do no change the longer term trends at work here.
Yields are controlled by Fed buying android not related to market participants expectations of inflation. Bond vigilantes are dead. Bernank killed them with QE.
So you get stealth inflation and zero yields, it’s called financial repression of the savers and has been going on for the past decade.
Sure, FRBNY can set its rates, but what do “savers” do in response? They continue seek for yield mindlessly enabling the folks on wallstreet managing their money to continue doing dumb ass things making the state of the situation worse.
Those “savers” will wished they actually saved cash for the past 10 years and took the hit on inflation when US indices have their 1989-1999 n225 moment and wipe out far more of their savings than what they were investing to protect against…
10 year tips closed at (-.78) , meaning that investors will earn a real yield of negative 78 basis points. Based upon the 10 year Treasury yield at .684, investors are assuming a 10 year inflation rate of 1.56%.
Sorry should be an inflation rate of %1.46
Which is the break even inflation rate, making these notes a good investment, unless the bidders (USG) step in and the paper sells at a premium. CPI dot plot was subnormally biased before the virus. ‘Expectations’ have not caught up with what market participants would be pricing in at this stage. The money machine has restored the all in one market, meaning all mispricing is filled in.
The 2% self imposed Fed inflation mandate Is an economic crime, it’s destroying the fabric of our society by slowly eroding the purchasing power of the most needy.
2% inflation is doubling of price level every generation, it’s insane, and it is the source of all speculation, anxiety and inequality.
I have trouble explaining how the current civil unrest relates to our fiscal policy (to people who chose to keep thier head in the sand and dont see the connection) but this sums it up nicely. Thank you.
Please define “able”. Hoping to be able, temporarily able, or ‘Holy Shit, everything made available is gone now” able. Is this “We’ve got you by the body part” type pass on?
Looks like a melt up to me
It’s not inflation. It’s consolidation in every sector in the economy.
TIL that there are like 5 power tool manufacturers.
I think the oft quoted “70 percent of the economy” is consumer spending – on goods and services.
David G LA,
In Q1, Services = 70.3% of GDP. Services are consumed by consumers, businesses, and governments.
In Q1: services = $15.15 trillion seasonally adjusted annual rate; GDP = $21.54 trillion SAAR.
Wow that is mind boggling. I had no idea it was that high. thanks!
With 1/3 of the economy offline, FedGov delivering stimulus out the wazoo to replace lost incomes, of course the remainder of the economy will have demand pressures and be raising prices.
In fact, if the surviving 2/3 raised prices 50%, you could have 1/3 unemployed and yet nominal GDP wouldn’t even drop.
Why would anyone buy bonds if yields are below are below the inflation rate. The logical conclusion is that the Fed will have to be the buyer of all Treasuries
To protect the value of their 401k plans.I moved to 80% bonds yesterday.I have a really funny feeling about this market,and I don’t want a repeat of 08 since I’m so close to retirement.
I like short term govt bonds as a place to park money waiting for better prices on stocks. Fed’s trying to get you to spend with Nirp. I would rather do without and wait for better pricing. It will happen on stocks eventually unless they go Weimar.
The move to negative rates may cause a complementary surge in asset value. Those who are speculating ahead of the policy stand to make a quick profit. What happens if you are not nimble, or the imagined constants, US dollar, turn out to be a variable? Some time back I bought a 30yr TIP at nearly 80 cents to par. Should rates go negative that might be the case again, and investors take your profits up front. http://danielamerman.com/va/NegRateQuantEase.html
“Covid Surcharge” will become a common line item on as many invoices and services as possible. Not too long till Banks, Insurance, Phone, Cable, etc.. all try to collect ??
That’s OK, we customers should demand a ten percent discount for showing up at the retail location, thus saving them the cost of shipping.
The dollar is dead, long live the dollar!
“Higher ingredient costs” will become the rallying cry for price expansion.
To wit: local dive bar (loss leader) breakfast was $6.99 pre shutdwn.
Now $9.99. Same content.
Any inflation will be initially “explained away” as temporary.
Then it will be embraced as welcomed and a “good sign” of economic activity.
The Fed will delay any response to the inflation for as long a they can. When they do, it will be a “limping in” of modest ineffective 1/4 pt raises.
Remember, the Fed serves only their master, who just happens to be the largest borrower in the world.
Yes, consumer inflation does seem to be spiking in *some* parts of the Western world’s economy.
In the UK, for example, petrol (gas) has deflated by about -20% this year, to under £1 a litre.
By contrast, the cost of a haircut has inflated this month by around +20%, as hairstylists try to clawback cash lost thru social distancing.
In the supermarket, like Tesco, you can see chocolate bars have shrunk in size quite dramatically in recent months, perhaps by -20%, while the retail price stays the same.
The seesawing GBP currency is also stoking inflation and deflation, as it cycles wildly up and down.
So… the UK right now is seeing a curious mix of deflation, inflation and stagflation.
Organized chaos ;-)
Wait once brexit hits next year, that is scary as I haven’t seen an agreement with other country which proved better than the one under the EU .
I also noticed there are no longer multibuys discounts in Tesco on some products I use to enjoy for more than a year. That is the only inflation I personally feel in UK at the moment. I haven’t gone to hairdresser yet so dont know if it has gone up
Stockman has been saying that a lot of good jobs left the US and were replaced by bar and restaurant jobs. A lot of those businesses were not very profitable and will be gone forever.
Left??? Good jobs have been leaving manufacturing since 1924 and Services since 2001. Consolidation is a “b”.
It’s no wonder they keep on trying to boost non-white consumption.
My family’s regular income has dropped by maybe 25-30% since March 15, but our spending has easily dropped that much too, because there’s not much to spend on. We got a stimulus check which went right to savings. Actually our savings has grown during this period. It would be easy to stop this “inflation:” just stop the government cheese and let the real unemployment rate shine.
I own a “luxury” service business- a recording studio in a city/region that’s NOT a hub for the entertainment business. This means I mostly get dreamers and day trippers. As soon as the stimulus checks came, I started getting calls for bookings from many of my “less forward-looking” clients. I fully expect that business to drop off quickly unless we see more checks soon.
Some of that is trying to make up ground lost in the 2nd quarter. My guess the current stall will reverse prices once again.
I have been waiting for some higher inflation for ~10 years now, but it didn’t happen. There was mild inflation, increasing median compensation and basically an excellent economy from ~1945-1980. You could argue it started getting worse in the ’70’s with the worsening stagflation- which can be measured by the misery index.
The misery index is now where it was during the good times. Painful stagflation really only happens when the misery index gets near 10. We are at about 5 right now.
These recent surcharges are sort of what the financial tinkerers wanted- some cost-push for the real economy. If the dollar weakens, then we will see some real changes, which might be very bad in the short run and very good in the long run for the average US worker/consumer.
A weak dollar is not good short term, long term or any term for the average worker. This narrative is has been pushed for a long time now by the Large Multinationals. Remember, these are the Folks that control virtually 100% of the narrative now. Remember, as well, what the father of modern propaganda said, “if you repeat a lie often enough, people will believe it, and you will even come to believe it yourself”.
Also, inflation and a weak dollar will help out another entity, one who’s empire is dependent on commercial RE. Not saying that the other choice is one iota better, or any less corrupt, but there’s that as well.
In a trading region (e.g. a country) with government/social welfare and other employment costs, if the local currency is too strong, imports will essentially be dumped by much “cheaper labor” areas/countries. That is what is happening now, in fact. I am using “cheaper labor” kindly. Actually many other places use worse than cheap labor.
Between ~1980-1994 the dollar lost about 35% of its value (!). The US economy had a strong run in those years. See the Plaza Accord.
As with most items marketed in an economy, you want the “fair”/”market clearing” price for the currency- not too strong and not too weak.
There has been plenty of inflation — or rather increases in “the costs of living.” But hedonic quality adjustments and other methods in the Consumer Price Index (CPI) have opened a wide gap between the increases in the “costs of living” and CPI.
Here is my analysis about the impact of this on the price of new cars. I used the price of the bestselling F150 XLT pickup and the Camry LE. Since 1990, the price for an F150 XLT skyrocketed by 163%. The price of a Camry LE surged by 70%. And the CPI for “new vehicles” rose just 22%.
This is really a fun read with eye-popping charts and all (I’ll do an update when the 2021 model year vehicles are fully available)
The main cost/inflation problems for the “average” person over decades are in medical care and college tuition (these are rising wildly). Vehicle, or put more broadly, transportation is a tough analysis.
In ~ the last 25 years cars last ~ 40% longer(!). Gasoline sales are down about -20% (per capita), miles driven down ~-15% (per capita). The gas mileage one can get (if that’s one’s goal) is much better for the same performance otherwise.
I have seen analyses that show the costs for transportation over the past 20-30 years most closely correlate to the cost of gasoline, which makes some sense.
Anyway, the evolution of vehicles and their usage in the US is really something to behold. I never thought I would see some of the performance capabilities (mechanical) that are available today. Six cylinder Fords with 300hp and 21mpg vs. my former ’64 ford i6 with about 150hp and 25 mpg (when driven right).
Wolf, where did you get your data for the car price index? I bought a 1985 Camry LE. It cost considerably more than the amount your chart shows for a 1990 model.
I believe it was $17k, which was based on consumer reports dealer cost, plus a few hundred profit.
Base MSRP LE package, no add-on options, no Lift-Back, 1985: $10,898
1990 Camry LE MSRP, which is the beginning of my time series (red in the second chart): $14,658
If you paid “considerably” more for your 1985 LE than the 1990 MSRP, you likely bought one that was gold-plated. Or you closed your eyes when you did the deal. Or you forgot how much you paid 35 years ago :-]
Is education considered as part of the service industry? I am guessing it is.
Many schools are going online without reducing tuition. That’s inflation. Even with a reduction of 10% like what Yale is doing, online classes are just not that effective beyond a certain number of students.
Inflation for the immediate future should be expected. The government program of paying people more not to work, than to work, is going to push wage inflation.
In addition, we have mass shortages caused by supply chain disruptions and the fact that many items made in China are simply not available, so people are willing to pay increased prices for whatever is available.
Both of these situations are temporary, and when they are no longer pushing prices upwards the deflationary pressures will begin to assert themselves.
I would harken back to our to what our now “toppled” Founding Father once said, I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake up homeless ln the continent their fathers conquered”.
Businesses optimize their operations in a stable environment, in a tumultuous environments like the current situation creates a lot of waste. Not knowing what to plan for and running out of some supplies while excesses in others. So they are forced to raise their prices or go broke. It appears many decided to quit and those that were still alive, raised their prices and lived to see another day. Decrease in demand can readily coexist with increase in price.
Lastly, what I would ask is what can the average person do to try and preserve and protect what they currently have? My ‘solution’ is diversification in non corelated assets. Folks think they can diversify by having a virtually all stock portfolio, or a classic 60/40. My view is those days are now behind us. I believe now that I must just accept the fact that virtually anything can happen and if one is truly diversified at least some of the asset classes that one holds will be going down (sometimes dramatically) and will require one to hold their nose when the rebalancing bands are hit. I think a truly diversified portfolio along with sticking to an asset allocation that forces the average person to sell high and buy low is their only chance here. I also think that the average market participant would be better served taking an absolute agnostic view of the markets with regard to their retirement funds, or core portfolio. One of the best and most resilient portfolios that has stood the test of time and has served to protect the wealth that one has is the Harry Browne Permanent Portfolio. I would encourage the Wolfstreet crowd to read “Fail-Safe Investing” by Browne and The Permanent Portfolio” by Craig Rowland & J.M. Lawson to look at what a long term, simple, truly diversified portfolio even looks like.
I would also go to the website portfoliocharts.com and look at the insights section on how some of these defensive diversified portfolios have held up over time.
The only thing to note about the PP is it has a slight bias towards inflation and it’s slight Achilles Heel is in a “tight money recession” where the Cash position can’t really pull the load for the rest of the portfolio and can only act as a buffer. Additionally, in the insights section you will find an excellent treatise on how cash works in a portfolio and is such an excellent asset class, when combined with other non corelated asset classes.
In my view we are now getting a good look at what an ‘end of empire’ looks like in a modern context. We are very definitely living in ‘interesting times’.
Good luck here, for we are all going to need it.
I think Jdog gave a very good explanation (see below) on “what is going to increase in value” :)
Andrei, no one knows what is going to go up in value, or go down. You can speculate what you think will go up in value, but you can’t know the unknowable.
Who could have predicted what has happened in the last 4 months???
Did jdog predict that? And even if he did and flipped a friggen coin 20 times on heads, can he do it again?
Inflation is inevitable when the government orders people to stop working, pays them to stay at home, and limits the places where they can spend their money. It’s just an all around bad idea.
Wait till pre-1865 slavery reparations hit. More free money flooding the place.
Nothing is inevitable.
The primary indicator of inflation is stocks. Wages and services did not keep up, had more to do with outsourcing manufacturing jobs, (many of those finished goods service sector needs) and importing low paid service workers. Their hubris in assuming the benefits of their anti-inflation policy, (which kept corporate labor costs low) will come to a close. Almost as good as slavery, when they start pulling down pictures of central bankers we might have some resolution
I think 99% of America have no knowledge of the existence of central bankers.
Our SJWs want free stuff, that’s it.
And their looter allies.
Ambrose, usually equities and bonds get whacked really hard in inflation until the inflation is approaching hyperinflation. Only then do equities move up in nominal terms. Look at the 1970’s.
If you think equities will do well in inflation history isn’t on your side on this. Sure, PM and base metal miners and oil equities will do well and commodities in general, but broad market stocks and bonds will most likely get killed. The thing is- nobody knows what will happen. There is nobody that can provide any certainty here. You can only diversify and batten down the hatches and hope it’s not going to Parallel that Robert Redford Movie “All is Lost”.
When you are looking at what is going to increase in value, it is always going to be what there is higher demand for, and less supply of in the future.
In the current environment, there is no shortage of assets or debt. What there is a shortage of, and will be more of going forward is income and solvency. Neither of these shortages will be solved by borrowing, and in fact will be exasperated.
As the natural course of impacts of this virus, on top of the existing economic factors plays out, what will be in demand is the money to make payments, when income is lagging. The real shortage today is earned income, and that shortage cannot be replaced be borrowed money. You cannot borrow your way to solvency.
The collapse in the commercial real estate market will be the bag of straw that breaks the economies back. Once the cascade of defaults begins, it will spread like this virus throughout the entire economy.
As I drove through my town today, I began to notice how many businesses are now closed, and we are in an area where things have been relatively good so far as unemployment numbers go.
The can is still being kicked down the road, but the end of the road is now visible, and coming up fast….
Re “You cannot borrow your way to solvency.”
Looks to me like the Feds CAN print us all to solvency. Congress spends, Federal Reserve expands balance sheet, and voila! Income problem solved.
Of course that approach comes with a cost, part of which being maldistribution since Congress won’t print solvency for everyone.
And after that comes the massive list of unintended adverse consequences…
If you believe that, then you really do not understand how the Fed works. The Fed does not give money away, it loans it, at interest.
The debts that government incurs to give people money now, must be serviced inn the future. Debt service was 20% of the Federal budget before it went on its current borrowing binge. That is going to increase substantially. There are going to be government budget “crisis” that will have to be faced after the elections, on a Federal, State, and local level.
The only place the government’s can get more money to pay their growing debt service is to increase taxes. The money the government is freely giving away in a election year, will be cut off, and taxes will be raised when the politicians are securely in place for the next 4 years…….
“The Fed does not give money away, it loans it, at interest.”
That’s only a tiny part of what the Fed does in terms of QE. Only about 3% of its total assets are loans, such as those to the SPVs.
Most of the rest are purchases (it creates money and buys securities with this freshly created money) and currency swaps (it creates dollars and exchanges those for other currencies via the swap lines with central banks). Here is the detail and how it works, including all the charts you need — you should read the entire thing:
I live here in Canada and live on $9,000 a year. My investment income is $50,000 a year from long term Canada, provincial bonds 3.75% to 4.5% bought back in 2008, 2009, 2010, 2011, 2012 and a whole bunch of 5, 7 and now 10 year GIC’s now. It is a good thing about 80% of my money does not mature until 2037, 2038, 2039.
After I pay my income taxes, $9,345 last year, so $40,655 I just bought some EQ Bank 10 year 2.70% CDIC covered GIC’s which pay much higher than government and most bonds these days by a long shot. I personally see stock markets going up another 20% from here but watch out, in 2021 after the Trump win and election stock markets will fall by 50% at minimum, ouch, I don’t want to be stuck in there.
I can get my early C.P.P in 2021. It is not alot $856 a month but hey $10,000+ a year I will take it it will cover all my living expenses, property taxes etc.
It is very simple, my property taxes, food, TV, internet, car insurance, car maintenance, home insurance, clothing and other necessities etc. is well monitored and has taken a big jump in 3 years. I used to live on $8,000 a year but that was already low.