This combo of massive QE, repressed interest rates, huge government stimulus with borrowed money, and raging inflation is new in recent history.
By Wolf Richter. This is the transcript of my podcast of last Sunday, THE WOLF STREET REPORT.
This stuff is now going on everywhere, all the time, at all levels. Polaris, the Minnesota-based manufacturer that makes the Indian Chief motorcycles, a variety of snowmobiles, off-road vehicles, and other vehicles, raised its prices in May in response to higher input costs, and now, a couple of months later, it is again contemplating price increases.
Big consumer-products makers have been announcing price increases, and sometimes sequential price increases, since earlier this year. This includes Procter & Gamble, Coca-Cola, Kimberly-Clark, General Mills, Unilever, and many others.
Unilever, which makes products across beauty and personal care, home care, and food and drinks, announced price increases in April. Then a few days ago it said that if would accelerate and fatten those price increases because of still rising costs of ingredients, packaging materials, and transportation.
It said that “inflation has been higher than we anticipated.” And that has been the universal truth all year.
Automakers don’t announce price increases during the model year; manufacturer’s suggested retail prices, or MSRPs, are announced at the beginning of the model year. But what they’re doing is cutting back incentives, and people just pay a whole lot more for new vehicles. And profit margins have ballooned at automakers and at dealers. The largest auto dealer, AutoNation, disclosed monstrous historic per-new-vehicle gross profits.
Other companies use dynamic pricing which changes prices from minute to minute, and from location to location, such as rental cars, hotels, plane tickets, and the like, and those prices have shot up.
Small companies also face input cost increases, and they raise their prices for goods and services they provide. Everyone I know who has a small business has either already increased prices, or is now planning and implementing price increases.
In my little bailiwick, all the services I need in order to run my WOLF STREET media mogul empire have gone up in price: the costs associated with the dedicated server at a server farm, the costs of the email service that many readers subscribe to, the costs of the broadband service, which doubled….
Heck, even the beer mugs I send out as thank-you gifts for generous donations. All the costs around them have gone up: The cost of the mugs, the cost of shipping them on a pallet to my global headquarters, the cost of shipping them individually to the final recipients, the costs of the cardboard boxes, the cost of the special filler material that I so lovingly wrap them in. This has been an ongoing litany.
The good thing is that WOLF STREET is supported by ads and donations and doesn’t sell anything, and so there are no price increases, and no shrinking or ballooning profit margins. I just eat the higher costs.
All companies are struggling in their own way with higher costs and are weighing or have already implemented price increases. Small companies are quietly raising prices of goods and services they provide, without media-savvy announcement. They simply let their customers know what is coming, and their customers have their own issues with costs and prices, and they already know what’s coming.
But big public companies that everyone knows are in a different ballgame. When big consumer-products companies announce price increases, it’s an effort at a form of perfectly legal price fixing.
With a price-increase announcement, the company lets the competition know what it is doing, and to what extent it is doing it, and thereby it is letting its competition know to what extent they can raise their prices without getting undercut. And they’re doing it.
And they cite higher input costs, such as materials, labor, and components, and higher transportation costs coming and going, and higher packaging material costs, and they all want to protect their profit margins, and they want to increase their revenues, and increase their profits, and the best way to do this is via price increases, if competition lets you get away with it, and if your customers can’t find a better deal and are staying with you despite the higher prices.
There is an art to raising prices and getting away with it, and this art has now kicked into high gear, and consumers are paying for the sharpest price increases without going on buyers’ strike.
A buyers’ strike would end these price increases, but something big has changed. The whole attitude about price increases has changed. An inflationary mindset has set in. And this psychology of inflation tends to be persistent.
The government has different inflation measures. According to its lowest lowball inflation measure, the Personal Consumption Expenditures Price Index without food and energy, inflation rose by 3.5% in June from last year. At the other end, the government’s Consumer Price Index version that it uses for the Cost of Living Adjustments to Social Security payments, jumped by 6.1% in June compared to a year ago. Private-sector measures are much higher.
Inflation means that the dollar loses its purchasing power. It means that labor loses its purchasing power. In other words, people have to work more the maintain their standard of living. Or people can work the same and cut their standard of living.
And people who get performance-based pay raises, and think that this greater performance is going to allow them to raise their standard of living, they find out that all or much of that performance pay raise just allowed them to keep up with the loss of the purchasing power of their labor dollar.
There’s another way, the Federal Reserve’s preferred way. This inflation is not an accident. The Fed was the primary engineer of this inflation with its policies, dominated by the biggest money-printing event in modern times and by 0% interest rates. Now the Fed wants people to make up for the loss of purchasing power of their labor by borrowing more.
The Fed keeps insisting over and over again that this inflation that it is largely responsible for is “temporary” or “transient.” But there is nothing temporary or transient in the loss of the purchasing power of the dollar, including of the labor dollar.
These prices of consumer goods and services that have jumped aren’t going back to where they were two years ago. Only deflation would do that.
But long stretches of deflation that would recapture some of the lost purchasing power of the dollar are not allowed in this country, and there have only been a few quarters during my lifetime of deflation. So long-term deflation is out, but long-term inflation is a reality. And now we have a massive bout of inflation, with the only question being whether it will get worse or better.
The Fed and economists and others point at lumber as an example as to why this inflation is temporary. Lumber had spiked in the spring to ridiculous levels, and everyone knew it would have to come back down because those spikes in commodities don’t last, and it came back down as expected. But it has now stabilized at a price that is roughly 50% higher than it was two years ago. The Fed isn’t talking about that part.
Other commodities are still spiking. Some, like lumber, have returned halfway to earth but remain much higher than two years ago.
There is always some kind of a unique story behind each and every one of these price increases, and sure the huge spikes will eventually unwind, but like lumber, prices are likely to remain much higher than two years ago.
Price increases in services have now commenced. This includes things like broadband and communication services, restaurants, travel related services such as plane tickets, hotels, rental cars, and many others. Services are two-thirds of consumer spending.
One of the biggies among services is rents. Rents are surging for suburban single-family houses. And they’re surging for apartments outside the urban cores of the largest cities. Apartment rents in many large urban cores are still lower than they were two years ago – this includes San Francisco where asking rents are down over 25% from two years ago, as the city’s population has declined. But in cities an hour or two by car from San Francisco, rents have spiked. And as always there are unique stories behind all of them.
But the underlying common thread of these price increases is that there is a huge amount of money – of newly created money – blindly and vigorously chasing after limited goods and services.
No one has ever been through a combination like this before:
The biggest money-printing spree in modern times, where the Fed printed $4 trillion in 16 months and spread them around, and repressed short-term interest rates via its policy rates, and repressed long-term interest rates via its continued bond purchases that still amount to $120 billion every month.
All of this simultaneously with the biggest fiscal stimulus of modern times, about $5 trillion in borrowed money that the government then spread around over a period of 16 months, and much of this fiscal stimulus and deficit spending continues.
No one has ever been through this kind of combination of massive monetary and fiscal stimulus while inflation was raging.
You have to go back to the 1970s and early 1980s to see the pace of inflation we’ve experienced over the past few months. And back then, interest rates were much higher, and there was no QE. And even back then, inflation didn’t just go away of its own.
So now, to support their claim that this is transitory and will go away on its own, the Fed, the government, and some economists point at inflation expectations in the bond market. They measure this by looking at government bond yields, including the yield of 10-year Treasury securities and the yield of 10-year Treasury Inflation-Protected Securities, or TIPS.
And given how low yields are, and how small the difference is between the regular 10-year Treasury yield and the TIPS yield, they’re saying that inflation expectations by the market are well-anchored at around 2.5%.
But this is a bunch of hocus-pocus because the Fed is still buying Treasury securities, thereby pushing down those yields, and the Fed is still buying TIPS, and has bought more TIPS since March 2020 than the government has issued.
All the yields are immensely manipulated by the Fed, they’re the product of the Fed’s policies, and now the Fed is citing these forced-down yields as an indication that markets see this inflation as temporary that will go away next year? Come on, give me a break. This is just manipulative hogwash.
As long as the Fed purchases bonds in such huge quantities, the market says nothing about future inflation. What the market is saying is a reflection of the Fed’s policies and manipulations.
No one has been through this combo of bond market manipulations, massive QE, repressed interest rate, huge government stimulus with borrowed money, and raging inflation.
That combo hasn’t happened in recent history. But now we’re in the middle of it. Even when the Fed tapers its asset purchases, it will be too little too late. And interest rates are still at zero, and there is no discussion about a liftoff yet. And the government’s fiscal stimulus with borrowed money continues. The most likely outcome is a persistent heavy loss of the dollar’s purchasing power – until the Fed decides that enough is enough.
At that point, if it seriously wants to bring inflation back down, it will have to be aggressive because by that time, the inflationary spiral is likely to have been ingrained and will be tough and painful to dislodge.
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