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FED’S KEY INFLATION GAUGE HITS 30-YEAR HIGH
The Core Personal Consumption Expenditures Index, the U.S. Federal Reserve’s preferred measure of inflation, rose to 3.6 percent in August from a year earlier, the U.S. Bureau of Economic Analysis reported, the number’s biggest jump since May 1991.
The index excludes the costs of energy and food.
The increase edged past Dow Jones’ 3.5-percent forecast and rose 0.3 percent from July.
The more-publicized Consumer Price Index climbed to 4.3 percent year on year, a rate unmatched since January 1991.
The 12-month spike reflected a 2.8-percent increase in food prices and a 24.9-percent leap in energy costs.
The numbers reflect the price of used cars rising once again, oil and natural gas costing more, and supply chain chaos continuing, leaving many staples in short supply, The New York Times noted.
Inflation’s climb is likely to last longer than policymakers had expected (see related story), stoking fears in Washington and on Wall Street that more workers could press demands for higher pay, setting off an inflationary spiral that would be hard to rein in.
Most price increases have been caused by supply chain disruptions, officials say, meaning that upward price pressures will ease as logistics snarls untangle.
However, shipping companies expect the backlog of container ships stuck waiting for port space will continue into next year, as we reported in “Shipper Books Tenfold Increase in Net Profits” (17 Aug 2021).
In addition, rents are climbing relentlessly, the semiconductor shortage shows no signs of abating, and Chinese factories are cutting production in the face of persistent electricity outages (see related story).
Those inflationary factors are unrelated to problems in the transport industry.
While consumer prices increased, so did consumers’ positive outlook: the University of Michigan’s index of consumer sentiment edged up to 72.8 in September, compared to 70.8 the month before.
Real income in August increased just 0.2 percent, signaling that consumers’ cost of living is rising way faster than their earnings.
Partly as a result, the personal savings rate slipped from 10.1 percent in July to 9.4 percent in August.
Savings peaked in April 2020 at 33.8 percent of income, just after the economy shut down.
Manufacturers also produced more again last month.
September’s ISM Manufacturing Index registered 61.1, the percentage of companies expanding production. Ratings above 50 represent growth; the larger the number, the more robust the activity.
Manufacturers’ costs are still rising, the survey found, with 81.2 percent of those responding reporting increases, compared to 79.4 percent in August.
“Supply chain concerns are growing beyond electronics and chips into most other commodities,” an electronics industry executive said to the NYT.
“Lead times are extending, shipping lanes are slowing, and we will not see an end to this in 2021,” the executive predicted.
Consumer spending rose 0.8 percent in August against a downwardly revised -0.1 percent in July, highlighting “only a scant gain” in individual spending during the third quarter, compared to more than a 10-percent gain during the first six months of this year.
Economists polled by Bloomberg predicted overall consumer spending would progress by 2.2 percent last month.
Spending on services rose 0.3 percent in August after slipping 0.7 percent in July; spending on goods rose 0.6 percent after stumbling by 2.6 percent last month.
The Fed foresees the Core Personal Consumption Expenditures Index averaging 4.2 percent during this year’s final quarter, no longer the 3.4 percent it had predicted in June, and settling at 2.2 percent at the end of 2022.
TREND FORECAST: The greater the supply chain jams which are not expected to ease, the higher inflation will rise. Also pushing up supply chain worries are the lack of truckers and concerns that overworked laborers at snarled ports may start to rebel, thus causing the jams to last longer.
And as we noted, today, the Federal Reserve Bank of Atlanta reported that “The GDPNow model estimate for real GDP growth in the third quarter of 2021 is 2.3 percent on October 1,” which is a steep drop from 2 August when the forecast was for 6.3 percent growth. Thus, considering the overall stressful economic conditions, the “Biden Bounce” that we had forecast back in January would happen—but be temporary—is coming to an end. (See, “THE BIDEN BOUNCE, THE WORST IS YET TO COME” )
ANALYSTS WRONG. NOT STAGFLATION, IT WILL BE DRAGFLATION
Rampant inflation and a shortage of goods are colliding with signs the world’s economy is slowing.
The result, according to mainstream media economists, could be stagflation, when prices continue to rise as wages and overall economic growth stagnate.
Stagflation last reared in the early and mid-1970s, when interest rates shot up to double digits and U.S. unemployment topped 8 percent.
Now the ingredients for stagflation are coming together again.
- The world’s economy is losing momentum, with Chinese factories facing blackouts and tangled supply lines leaving consumers and manufacturers short of essential items.
- Oil prices shot past $80 a barrel on 30 September as shortages loomed across Europe and other parts of the world.
- Central banks in Europe and the U.S. are preparing to join those of Brazil, Pakistan, Russia, and other nations in raising interest rates at a time when economies are losing steam.
The U.S. Federal Reserve’s announced plan to begin winding down its economic support programs prompted a sharp bond selloff, which spilled over into equity markets during September’s last days.
The signs are particularly grim in the U.K., with gasoline prices spiking and a shortage of drivers to deliver it to gas stations. The government has mobilized soldiers to deliver the gasoline.
Labor shortages and supply glitches, not only in energy markets but across the economy, could power inflation for months to come, Bank of England governor Andrew Bailey said in a statement cited by the Financial Times.
“If it is stagflation, central banks are in a bind,” James Leaviss, who directs fixed income investments at M&G Investments. “Hiking [interest rates] will reduce demand a little bit and strengthen the currency,” he pointed out, “but will have no impact on supply chain issues [or] bring back lorry drivers.”
Mohamed El-Erien, chief economic advisor at Allianz, agreed.
“Central banks will be torn between reacting to the ‘stag’ and the ‘flation’,” he said in comments quoted by the FT.
“That’s a world where investors’ confidence in policymakers is shaken and the backstop they’ve had over the past decade isn’t there any more.”
TREND FORECAST: We disagree. As we had forecast back in June 2020, DRAGFLATION TO HIT HARD , prices will rise, wages will not keep up with inflation and the economy will decline.
TREND FORECAST: We surfaced the prospect of stagflation in our 11 February, 2020, article “China Fights the Virus With Money.” Since we first raised that warning, more and more factors are converging to prove us correct.
The risks of dragflation are growing rapidly and governments and central banks are out of tools to both control it and keep economies chugging ahead.
SEPTEMBER PRICES IN EUROPE INFLATED FASTEST IN 13 YEARS
In September, Eurozone consumer prices rose faster than at any time in the last 13 years, adding evidence that inflation will run higher and last longer than policymakers had expected, The Wall Street Journal reported.
Consumer prices rose 3.4 percent year over year last month, the highest since September 2008 and more than the European Central Bank (ECB) had expected, the WSJ said.
The cost of services was up 1.7 percent.
The rate also exceeded August’s 3 percent price rise.
Energy prices drove the price spike, exploding 17.4 percent year on year.
However, oil and gas prices a year ago were abnormally low, due to slumps in travel and manufacturing forced by the global economic shutdown.
Therefore, a portion of the price jump is simply a matter of costs returning to normal, economists point out, an effect that will settle out of the economy in the months ahead, they say.
Persistent inflation increases the risk of a self-fueling inflationary spiral, in which workers demand higher pay to reverse their shrinking purchasing power, leading businesses to pass higher costs to consumers now able to afford it because they make more money.
That may be under way: Germany’s formidable IG Metall union has threatened an October strike if certain companies refuse to raise wages 4.5 percent.
Galloping inflation challenges the European Central Bank’s (ECB) steadfast policy position of maintaining economic supports, including negative interest rates, at least through the end of this year and possibly another year beyond that.
Most economists believe that at its December meeting, the ECB will decide to end its €1.85-trillion bond-buying program in the face of higher inflation.
The bank also has said it plans to leave its negative interest rate untouched through 2023.
Economists have said that price pressures will ease as chaos in supply lines eases, a scenario unlikely to come to pass for months, as we have reported in “Shipper Books Tenfold Increase in Net Profits” (17 Aug 2021).
TREND FORECAST: With Europe’s inflation rate setting records month after month, the ECB does not have the luxury of waiting more than two years to raise its base interest rate from the -0.5 percent where it has been for the last five years.
Europe’s economic recovery remains weak, despite a recent bump in consumer spending (see related story). The bank will be forced to edge rates up, but will do so in small increments, well spaced, with plenty of advance notice so markets can adjust to the gradual, but steady, return to realistic rates.
GERMANY’S INFLATION WORST IN 29 YEARS: WILL INTEREST RATES RISE?
Germany’s 4.1-percent inflation rate in September was the highest since 1992, the Financial Times reported.
Energy drove the increase, notching a 14.3-percent price jump. Food costs rose 4.9 percent, goods were up 6.1 percent, and services 2.5 percent.
“In the past, producers absorbed higher costs by profit margin squeezing,” Carsten Brzeski, ING’s research chief, said to the FT.
“This time around, they seem to be willing to pass on higher costs to consumers,” he added.
“The worst is yet to come,” Jorg Kramer, chief Commerzbank economist, told the FT.
Even if inflation eases somewhat next year, “in the long term, we expect an inflation problem for Germany and the euro area,” he said.
Spain’s inflation of 4 percent in September marked a 13-year high; France’s 2.7-percent inflation during the month was the worst in 10 years.
Germany’s inflation could reach 5 percent this year before settling down, the country’s central bank said, but also foresaw “upside risks” regarding price gains.
Economists predict 3.3-percent inflation across the Eurozone, while the European Central Bank has forecast a 2.2-percent rate this year, slowing to 1.7 in 2022.
TREND FORECAST: The European Central bank says it is due to revisit its forecasts in December. Because of concerns of a slow economic recovery, the ECB had said it was willing to let inflation run a bit hot. They said its key rate at minus 0.5 percent (where it has languished since June of 2014) won’t go higher until inflation moves near its 2 percent target.
We disagree. As inflation spikes and the Euro begins to tank, interest rates will rise.
MONTHS OF INFLATION AHEAD, FOOD COMPANIES WARN
General Mills, the Minneapolis-based purveyor of grain products worldwide, has said that rising costs of raw materials, fuel, and labor, added to logistics tangles and a shortage of truck drivers and other workers, will hike the prices that consumers pay for its products over the next several months.
“Our prices are going to go up for the remainder of the year,” CEO Jeff Harmening said in comments quoted by The Wall Street Journal.
Overall, the company expects its input costs to rise by 8 percent this year.
At the same time, shortages and supply chain disruptions will drag down its services to retailers to the 80th percentile range instead of the company’s goal of the high 90s.
Food prices are riding the worst wave of inflation in a decade, the WSJ reported, a trend we noted in “Inflation Ripples Through the U.S. Economy” (11 May 2021).
Campbell’s Soup Co. has raised prices and said earlier this month that the rising price of steel likely will force additional hikes in the weeks ahead.
Conagra Brands, the conglomerate that owns Duncan Hines, Marie Callender’s, and Birdseye foods also has raised prices.
Many makers have cut back on discounts, sales, and coupons, while others have left prices the same while reducing the amount of product in the package, a tactic known in the industry as “shrinkflation” (“Prices for Consumer Goods Set to Rise,” 4 May 2021).
TREND FORECAST: As we have noted many times, inflation is not “transitory” or “temporary” but will continue rising well into 2022. At best, its pace will not slow until supply chain disruptions begin to be repaired, a task that will in itself take months.
Even then, shortages of materials and workers will continue to push prices higher. In addition, as inflation goes higher and currencies drop lower, it will still cost yet more to buy products.
LUMBER PRICES CLIMBING AGAIN
After falling by almost half in August, year on year, lumber prices have bounced back.
Futures prices spiked almost 40 percent last month, with the closely-watched framing composite index from data service Random Lengths gaining 27 percent.
Key futures contracts were pricing at $625.10 per thousand board feet (mbf) last month, near their pre-COVID highs, The Wall Street Journal reported, but down from their peak above $1,700 reached last spring, which we reported in “Lumber Prices Add $36,000 to Cost of New Home” (4 May 2021).
However, prices need to rise before suppliers will be ready to meet demand, analysts told the WSJ—bad news for builders and others hoping that prices would settle back to the equivalent of the $357 per mbf average that prevailed from 2015 through 2019.
“Over the next few years, on average, prices are going to come off but they’re going to remain high relative to history,” lumber analyst Paul Jannke at Forest Economic Advisors told clients of the Canadian Imperial Bank of Commerce in a late September presentation cited by the WSJ.
As to the current price uptick, “we’re not done yet,” he said.
Lumber’s climbing prices are due, in part, to the wave of wildfires across western North America.
Sawmills in British Columbia began to cut production in July because the fires reduced their supplies of logs.
Even though the price of lumber dropped in July and August, lumber the mills could have bought from government supplies was priced based on last spring’s record prices.
As a result, some mills in western Canada—one of the continent’s chief lumber-producing centers—will remain shut until supplies return to a reasonable price; others will operate at a loss for some period, the WSJ said.
Until British Columbia’s mills are back in full operation, lumber dealers could fail to meet demand, as they now hold less wood in reserve than at any time since the last century, according to Forest Economic Advisors.
Lumber prices also are part of the broader hike in the cost of commodities generally, as we reported in “Commodities Supercycle Underway?” (11 May 2021).
Oat futures are trading now at or near record prices; the cost of natural gas shot up 61 percent in the second quarter.
TREND FORECAST: As we have noted, home affordability in the U.S. is at its highest rate since just before the Panic of ’08 struck. Thus, the more expensive houses become, they will be out of the reach of first time buyers which will instead rent homes. And as rental demand outstrips supply, rent prices will increase.
DARDEN STRUGGLES TO HOLD THE LINE ON MENU PRICES
Darden Restaurants, which owns 1,500 restaurants and eight chains, including Olive Garden and Longhorn Steakhouse, projects sales in 2022 of $9.4 to $9.6 billion, compared to $7.8 billion this year.
The chain is trying to ensure that the higher number doesn’t come about solely by raising menu prices.
“We want to make sure consumers we service can still come to our restaurants and get an extremely great value for what they have to pay,” CEO Eugene Lee said in a conference call last month with reporters cited by The Wall Street Journal.
“At some point, your average consumer could get priced out of casual dining,” he said.
Darden saw commodities inflation of 5.5 percent for its quarter ended 29 August, the company reported, and had to shop more on the spot market where prices are higher; even then, some foods were in short supply, company officials said.
Like all restaurants, Darden is looking for internal efficiencies and cost reductions before raising menu prices.
Also like all restaurants, Darden is struggling to keep its eateries staffed.
Due to a lack of waitstaff, Olive Garden stores are closing one or two seating sections most nights, cutting off revenue from six to eight tables, Darden said.
Darden is exploring ways in which automation can replace humans no longer willing to work in a physically demanding job that pays low wages and depends on tips.
Other restaurants, such as the Toast chain, are installing digital systems that allow diners to use tablets to order and pay from their tables, eliminating human servers, as we reported in “Virus Speeds Automation: Bye Bye Workers” (21 Sep 2021).
Darden’s share price has risen about 34 percent so far this year and closed on 23 September at $159.40.
TREND FORECAST: The restaurant business is hard In the best of times, as we noted in “Worker Shortages, Virus Hobble Restaurants’ Recovery” (14 Sep 2021).
The current, continuing wave of inflation will force Darden and other dining businesses to raise menu prices, shrinking the number of customers able to afford to eat out. The loss of business will lead to more eateries closing, more low-wage workers jobless, and more mindless jobs eliminated.
We repeat what we said in the article cited above: after the COVID wars are over, there will be fewer restaurants employing fewer workers, leaving fewer ways for teens and unskilled workers to find jobs.
DHL WILL HIKE FREIGHT PRICES 5.9 PERCENT
As of 1 January, logistics company DHL will increase prices 5.9 percent for U.S. parcel shippers, matching FedEx’s recently announced price bump.
DHL, which has limited domestic service within the U.S., raised prices 5.9 percent last year and an average of 4.9 percent this year.
In September, DHL announced plans to spend $360 million to add and upgrade facilities in the Americas and to expand its freighter fleet.
“You have general inflation” for fuel, labor, supplies, and other costs, “as well as added infrastructure, such as planes, trucks, and facilities,” Michael Parra, DHL’s CEO for the Americas, told The Wall Street Journal.
“We’ve got to cover for that,” he said.
Competing shipper UPS has not announced changes to its price structure for 2022.
TREND FORECAST: We note this article to again emphasize the scope and depth of inflation that is spreading through virtually every business sector. Thus, as prices rise, demand will decrease. And when the flow of cheap money begins to slow, a general economic slowdown will persist.
HOME PRICES CLIMB AT FASTEST RATE ON RECORD
U.S. home prices rose at a 19.7-percent annual rate during the 12 months ending 31 July, according to the S&P CoreLogic Case-Shiller National Home Price Index.
The pace was the greatest 12-month surge the index has recorded since it began in 1987 and edged past the 18.7-percent rate notched during the 12 months ending in June.
The index measures average home prices in major U.S. metro areas.
Prices in Phoenix rose fastest, the city’s 26th straight month at the head of the list, with a 32.4-percent rise; San Diego’s 27.8-percent sprint ranked the city second.
Case-Shiller’s 10-city index registered a 19.1-percent gain; the 20-city index showed a 19.9-percent leap.
However, the rate of price increases eased slightly in Cleveland, Detroit, and Washington, DC.
The number of people planning to buy a house in the next six months fell for a third consecutive month, according to the Conference Board’s September consumer survey.
TREND FORECAST: The housing frenzy is playing itself out, as we predicted in “Fed Policies Continue to Fuel Housing Frenzy” (22 Jun 2021).
Those able to afford today’s record prices and who have cash to put down on a property already have done so, leaving fewer prospective buyers able to afford a home.
Fewer houses are up for sale than at the height of the boom, which also indicates that a number of current owners are waiting to sell until prices ease, and they can afford to buy another home.
The growing number of Millennials and younger adults interested in buying will keep home prices high, as will the lack of available land on which builders can put up enough new homes at a selling price that can meet demand.
For the foreseeable future, home prices will remain unaffordable for many and homes will remain scarce for those able to buy, as we reported in “Housing Shortage Will Last for Years, Goldman Says” (1 Jun 2021).
TREND FORECAST: We have been reporting on the private equity groups such as Blackstone’s already considerable presence in the U.S. housing market, both directly and through its Invitation Homes subsidiary and others. (See “Invitation Homes to Buy $1 Billion Worth of Houses This Year,” 1 June 2021.)
With Blackstone, Cerberus Capital Management, and other private equity firms snapping up houses—sometimes buying them out from under individual families who have made offers—home prices will not only remain elevated for the indefinite future, but also fewer families will realize the dream of home ownership.
Instead of fulfilling their American dream, more families will remain tenants of private equity masters and other Bigs who leverage their ever-growing wealth to gather more money for themselves at the expense of ordinary people and families.
CARGO TRAFFIC STACKING UP: INFLATION RISING HIGHER
The port of Savannah, Ga., the U.S.’s fourth busiest, had 24 ships anchored outside and waiting for dock space on 28 September, twice as many as two weeks earlier, as noted in our article “Ships Clogs = Inflation” (14 Sep 2021.)
Imports exceeded 1.8 million loaded containers from January through August this year, 30.1 percent more than during the same period a year earlier.
The time a container waits to be taken inland from dockside has grown from an average of four or five days to as many as 12 at one point, Griff Lynch, executive director of the George Port Authority, told The Wall Street Journal.
The average time now was 9.2 days at the end of September, he noted.
The containers stack up, in part, because trucking companies are unable to find enough qualified drivers to move them.
Savannah’s is the most crowded U.S. East Coast port, with jams at Chinese, European, and, to a lesser extent, U.S. ports having follow-on effects around the world as companies seek alternate routes to get their goods ashore.
Ports at Long Beach and Los Angeles have had as many as 73 ships stacked up waiting in recent weeks, compared to 44 a month earlier that we reported in “Backlogged Ships: New Abnormal” (28 Sep 2021).
The number had edged down to 66 on 28 September, the WSJ said, still in record territory.
The demand for containers has raised the cost of moving a loaded container between continents from about $2,000 before COVID to as much as $16,000 or more now, as we reported in “China Closes Key Port Terminal: Trouble Ahead” (24 Aug 2021).
The Savannah terminals have been besieged by shipments for retailers trying to lay in stock before the Christmas shopping season, Lynch said.
“We have seen this transition from just-in-time in supply lines to just-in-case, and that is significantly changing our environment,” he said.
“Because of all this extra freight being imported, it’s creating a backlog from the ship side to the dock side to warehouses and across the whole supply chain.”
TREND FORECAST: In this and other Trends Journals we emphasized that the backlog at ports will make for a holiday shopping season that disappoints both retailers and their customers with rising prices and less profits.
And never mentioned in the media is the importance of having a self-sustaining economy and producing and manufacturing products at home rather than relying on foreign nations to fill the food and product supply chains. (See “Supply Chain Recovery: A Logistical Nightmare,” 14 Sep 2021).
And, as forecast, supply lines likely will remain disrupted well into next year’s first quarter, and perhaps beyond, keeping pressure on inflation. (See “Shipping Delays Helping to Inflate Prices,” 25 May 2021.)