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…
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?
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.