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INFLATION WILL GET WORSE, NOT BETTER, OECD SAYS
Through 2022, prices will increase significantly more than expected in the world’s most advanced economies, the Organization for Economic Cooperation and Development (OECD) said.
Inflation’s pace will quicken to 4.5 percent in this year’s final quarter, the OECD said, boosted by logistics tangles and climbing commodity prices.
“There are risks of much more persistent pressure on inflation in the future,” Luis de Guindos, vice-president of the European Central Bank, told a Financial Times online conference, especially in light of spiking energy costs in Europe and Asia that could ripple throughout manufacturing and consumer economies (see related story).
Natural gas prices have quadrupled in Europe so far this year, prompting governments to consider billions of euros in aid to households and affected businesses, the FT said.
Energy price jumps in Europe will boost inflation there by 0.2 to 0.3 percentage points this year, Morgan Stanley has calculated.
The OECD’s U.S. inflation forecast for the fourth quarter has risen from 2.9 percent earlier this summer to 3.6 percent now; the prediction for the U.K. went from 1.3 percent three months ago to 2.3 percent now.
In France, inflation will shoot to 1.6 percent, double the OECD’s earlier prediction. In Germany, prices will grow by 2.1 percent instead of the 1.6 percent forecast earlier.
The revised predictions come as the U.S. Federal Reserve and Bank of England are planning to cut back their economic stimulus and support programs.
Governments must communicate to their publics that rising inflation has “many temporary features” and is “mostly an adjustment of prices to levels that had always been expected after temporary dips” caused by the COVID-era economic shutdown, the OECD urged.
Policy makers face “a very difficult balancing act” managing inflation and they must discard the idea that they can fund anything simply by borrowing, OECD chief economist Laurence Boone said in comments quoted by the FT.
TRENDPOST: Blather about “temporary features” and “price adjustments” aside, Boone’s comment about central banks’ balancing act recognizes what we have been saying since before the COVID War: when Banksters shut off the flow of cheap money to fund speculation, markets will crash.
We continue our forecast from articles such as our 1 June, 2021 Market Overview that when the Fed bumps interest rates to 1.5 percent, the housing and equity markets will crumble.
EUROZONE COSTS RISE FASTEST IN 20 YEARS IN AUGUST
Snarls in supply chains pushed costs for manufacturers and service businesses to rise at their fastest pace since 2000, with the price of factories’ raw materials close to all-time highs, according to IHS Markit’s monthly purchasing managers surveys.
The survey results “highlight an unwelcome combination of sharply slower economic growth and steeply rising prices,” Chris Williamson, IHS’s chief business economist, said to the Financial Times.
Businesses said they are “often losing sales and customers” because of materials shortages, shipping delays, and higher costs, he noted.
Many of those higher costs are being passed to consumers and end-users, boosting those prices this month at their third-fastest rate in two decades, the surveys found.
The surveys also suggest that “inflation will rise further in the coming months than we have so far been assuming,” Jessica Hinds, Europe economist at Capital Economics, admitted in an FT interview.
In August, Eurozone consumer prices were rising at a 3-percent annual rate, a pace that may be slowing the region’s economic recovery.
IHS’s manufacturing output index slid from 59 in August to an eight-month low of 55.6 this month.
The services index dropped to 56.3, its lowest in four months.
Ratings above 50 indicate growth; numbers below 50 signal contraction.
TREND FORECAST: As we said in “Eurozone Inflation Rate Highest in a Year” (13 Apr 2020), years of low or negative interest rates and cheap money have failed to ignite sustained economic growth in Europe; Germany was edging into a recession when the COVID virus arrived.
As inflation surges, the European Central Bank will face growing pressure to raise its base interest rate from -0.5 percent, where it has sat for more than five years.
If it raises the rate beyond 0.25 percent quickly, Europe’s economy would be in turmoil. Any significant Europe-wide rate rise will be slow and gradual, regardless of the inflation rate.
Indeed, today, the European Central Bank Chief Bankster, Christine Largarde played down rising inflation rates: “The key challenge is to ensure that we do not overreact to transitory supply shocks that have no bearing on the medium term, while also nurturing the positive demand forces that could durably lift inflation towards our 2 percent inflation target.”
U.K. INFLATION TO STAY NEAR 4 PERCENT FOR MONTHS, BOE SAYS
Inflation throughout the U.K. economy will peak at 4 percent this year and remain at or near that level at least into next year’s second quarter, the Bank of England (BOE) has warned.
However, the bank’s policy committee voted to hold its base interest rate at its current 0.1 percent until government support programs end this month, then see how the labor market reacts.
Still, relentlessly rising prices have “strengthened the case” for “modest tightening of monetary policies” in the years ahead, the bank said in a statement.
The bank also discarded its previous guideline that it would not change policy until the kingdom had “materially recovered” from the COVID era’s economic shutdown.
The bank is likely to raise interest rates next year, analysts told the Financial Times, and markets immediately priced in a rate hike for February 2022 and another later next year, the FT reported.
“Our hunch is that the second half of [next] year seems more likely” for a rate hike, Ruth Gregory, senior U.K. economist at Capital Economics, said to the FT, “but the clear risk is that it happens earlier.”
The BOE’s Monetary Policy Committee voted 7 to 2 at its September meeting to continue buying government securities, a program that will total £895 billion when it closes at the end of this year.
INFLATION IS A LUMP OF COAL IN CHRISTMAS STOCKINGS?
FedEx and Nike have joined Costco and other major U.S. companies in warning that this year’s holiday shopping season will be defined by higher prices, as we detailed in “Costco CEO Confirms Trends Journal Forecast: Inflation 2021” (8 Jun 2021), and likely shortages of goods that usually are plentiful.
As we reported in “China Closes Key Port Terminal: Trouble Ahead” (24 Aug 2021), the cost of sailing a loaded shipping container across the Atlantic or Pacific ocean has risen from around $2,000 pre-COVID to as much as $16,000 now and, by some estimates, has been above $18,000 at some points this year.
These higher shipping costs are “permanent inflationary items,” Costco CEO Richard Galanti said in a recent conference call with analysts cited by CNBC.
Rising costs for labor, ground transport, and some commodities are “somewhat permanent,” he said.
Together, the higher costs mean higher prices for this year’s holiday gifts.
“We can’t hold onto those,” he said. “Some of that has to be passed on. We’re being pragmatic about it.”
“Retailers are really challenged right now by ‘how much can I pass on to the consumer’ versus ‘can I get other efficiencies out of my operation in order to hit my total margin?’,” retail consultant Keith Jelinek at Berkeley Research Group told CNBC.
At Costco, inflation is running between 3.5 and 4.5 percent, Galanti noted, adding that the cost of paper products is up 4 to 8 percent, and shortages of some plastic and pet items have pushed up prices from 5 to 11 percent.
Costco announced on 27 September that it will once again limit customers’ purchases of toilet paper and cleaning products.
Nike plans to raise prices this year due to “additional transportation, logistics and airfreight costs to move inventory,” CEO Matthew Friend said in a 23 September earnings call quoted by The Wall Street Journal.
General Mills has hiked its prices around the world for everything from cereal to cake mixes as labor, packaging, and trucking costs added 7 percent to the company’s expenses, CEO Jeff Harmening said in a June WSJ interview, adding that the company’s profits could dip as much as 2 percent this year.
Last week, FedEx announced a 5.9-percent bump in domestic U.S. shipping costs at a 7.9-percent hike for other services.
UPS also is making “market-rate adjustments” to its rates in some parts of the U.S. in response to labor shortages, CEO Carol Tome said in a 23 September CNBC interview.
“This is going to last for a while,” she warned. “These issues have been a long time coming and it’s going to take all of us working together to clear those blockages.”
“The combination of strong demand and supply-chain challenges could last longer than I anticipate and could lead people and businesses to raise their expectations for future inflation more than we have seen so far,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, noted in a 24 September speech.
TRENDPOST: As we have detailed throughout this Trends Journal, even the Fed admits it: a faster pace of inflation is now becoming somewhat of a fixture of the U.S. economy..
Inflation’s rate will slow somewhat as supply chains untangle and more goods make their way to manufacturers and consumers. However, prices will never return to their pre-COVID levels, which will look like bargains in the years ahead.
Steadily higher prices will force workers to demand higher wages. The two conjoined pressures are increasingly likely to set off an inflationary spiral that will be difficult to end without a significant economic recession or crash that will be brought on by sharply rising interest rates.
OIL, MINERAL PRICES CLIMBING AS A “GREEN” OUTLOOK CUTS PRODUCTION
Oil prices finished strong last week amid supply chain disruptions and strong demand from a recovering global economy, with Brent crude’s November futures price topping $80 per barrel on 28 September.
Equally important: investors see supplies shrinking as producers, especially major oil companies, cut back production for two reasons.
First, major producers have decided to hoard cash and reward shareholders with higher dividends instead of investing in exploration and new development that might never be pulled from the ground, analysts told The Wall Street Journal, highlighting a trend we detailed in “Betting on Oil” (22 Jun 2021).
Second, global pressures are growing on companies and consumers to reduce carbon emissions; the global fossil-fuel divestment movement directed at investors has drained more than $14 trillion from oil, gas, and coal companies since its beginning in 2013, as we reported in “Shareholders, Court Darken Oil Industry’s Future” (1 Jun 2021).
Spending on exploration and new production will edge up in future years, but will not return to 2019 levels and will reach no more than half of 2014’s record outlays, Rystad Energy predicted.
Natural gas prices in Britain and Europe are soaring, as we noted in “Will Surging Gas Prices Sink U.K, E.U. Economies?” (21 Sep 2021), and U.S. prices recently touched a 7.5-year high above $5 per million Btu’s, just as the winter heating season arrives.
Global prices for tin and aluminum have risen along with China’s restrictions on how much energy its processing plants can consume, due in part to recent floods knocking out electric generating capacity, which we noted in “Tin Prices Remain at Record Levels” (27 Jul 2021).
Copper’s price remains near its all-time high, due not only to supply disruptions but also to environmental concerns around mining and smelting operations, the WSJ reported.
Even with metals such as copper and tin demanding record prices, as we reported in “Commodities Supercycle Underway?” (11 May 2021), miners will spend, at most, about 30 percent less than 2012’s record amounts for each of the next five years, according to Jeffries investment bank.
That tightening outlook, along with environmental concerns, has drawn investors who see surging prices ahead and are encouraged by analysts’ warnings, cited by the WSJ, that commodities may be entering a cycle marked by erratic supplies and volatile prices.
TREND FORECAST: We concur that supplies of raw materials will be erratic and prices turbulent as environmental pressures and the needs of an industrialized world collide amid shortages of labor, transportation, minerals and fuel.
Also, it takes years to bring a new mineral mine or oil field to production, an investment of time and money that producers are now less willing to make, as noted above.
The environmental ethic is strong among young adults, as shown by companies that make consumer products adopting green sourcing, processing, and packaging.
Over the next decade, the “green shift” will gain momentum but will not eliminate consumers’ desires to own smartphones, mattresses, SUVs, and other essentials. As a result, recycling and “green manufacturing” will claim a greater place in the economy as a compromise between the green ethic and consumers’ needs.
ASIA OUTBIDS EUROPE FOR U.S. NATURAL GAS
Europe is facing a near-crisis-level natural gas shortage, as we reported in “Will Surging Gas Prices Sink U.K., E.U. Economies?” (21 Sep 2021), but Asian buyers are outbidding Europe for U.S. supplies that could offset the shortfall.
Gas prices in the U.K. rose to the equivalent of about $26 per million BTUs on 20 September, about five times the price in the U.S, the Financial Times reported, and October futures contracts zoomed to record high prices on 27 September, according to Oilprice.com.
The U.K.’s soaring prices have not yet lured producers of liquefied natural gas, the form in which gas can be shipped across oceans from the U.S.
The gas continues to travel to Asia, and sometimes South America, where it fetches even higher prices.
Countries in Asia “have more purchasing power now,” one unnamed liquefied gas broker told the FT.
“Europe has pipeline supplies and China and Japan don’t have any alternatives,” the broker pointed out.
Liquefied gas can be shipped to Japan for a cost of about $10 per million BTUs and draws buyers willing to pay slightly more than Europe’s current prices.
Prices will continue to rise as the regions try to lock in fuel, the broker said, adding, “It’s a race to secure the supplies.”
Trafigura and other commodity brokers, as well as Shell, BP, TotalEnergies, and other oil majors, have gas supplies and sales contracts that enable them to profit from the bidding war, the FT said.
Much of Europe’s gas is pipelined in from Russia, which reports itself unable to meet Europe’s current demand; some European critics believe the shortage is a political strong-arm tactic.
TREND FORECAST: Fuel is the commodity that underlies every economic sector.
Shortages and rising prices will define the pace of inflation around the world, meaning that prices throughout the global economy will be driven higher through the northern hemisphere’s winter heating season and into next summer as gas supplies are replenished, assuming that the supplies can be had and transport for them can be arranged.
Today’s fuel shortages and price inflation presages a longer arc of the same well into next year.
HOME SALES, PRICES RISE
New home sales edged up 1.5 percent in August from July to an annualized rate of 740,000 dwellings, the U.S. Department of Housing and Urban Development reported on 23 September.
The median sale price edged up $400 to $390,900, while the average selling price was $443,200.
The average home sold spent 17 days on the market, unchanged from July, according to the National Association of Realtors (NAR).
Low mortgage interest rates and a shortage of houses for sale, especially new homes, continues to spur high demand and higher prices, keeping both above their rates before the COVID virus arrived.
The median price of a new home has ballooned 20 percent over the past 12 months. In August 2020, the median was $325,500, according to government figures.
About 1.29 million existing homes were available for sale in August, according to the NAR, 1.5 percent fewer than in July.
The number represents about 2.6 months of inventory, still near a record shortage of supply.
In recent months, home sales have averaged an annualized rate of just below six million, NAR figures show, near historic highs, which peaked last October when homes sold at an annualized pace of 6.73 million.
Despite continued strong numbers, several indicators point to a cooling housing market.
First-time home buyers made up only 29 percent of sales in August, the lowest monthly proportion since January 2019.
“High home prices make for an unbalanced market, but prices would normalize with more supply,” said Lawrence Yun, chief economist for NAR, adding that securing a home remains “a major challenge for many prospective buyers.”
Most households shopping for a home but unable to buy fail because they are unable to find a home in their price range, according to a recent report from the National Association of Home Builders (NAHB).
Two-thirds of those who shopped for a home during this year’s second quarter spent at least three months looking without success, the NAHB study found.
Also, sales of existing single-family homes, condos, and co-ops slipped 2 percent last month, the sharpest decline since April, after growing by 2.2 percent in July and 1.6 in June, the NAR noted.
August’s existing-home sales also declined 1.5 percent year over year, the first such retreat since June 2020.
The median price of existing homes dropped from $359,500 in July to $356,700 in August, still roughly 15 percent higher than a year earlier.
In August, fewer offers were made on homes for sale, the NAR said, and fewer potential buyers waived home inspections and appraisal contingency provisions. Both were common tactics in the summer’s bidding contests.
The rate of price growth slowed in 43 of the 50 biggest metro areas, Zillow reported, and the number of listings showing price cuts rose for the fourth consecutive month to 12.3 percent.
“These data suggest that the surge in new home sales during the pandemic has ebbed and inventories of unsold homes have risen to a more normal level in relation to sales,” Conrad DeQuadros, Bream Capital’s senior economic advisor, told Reuters.
TREND FORECAST: Home price growth may be slowing, but it will not reverse until interest rates rise: more and more households have been permanently priced out of home ownership unless they inherit a house from a family member.
This will add even more energy to the boom in apartment construction, which had 21.6 percent more units under construction in August this year than in August 2020, according to the U.S. commerce department.
“A shift to rental buildings means less access to home ownership over the long run and less opportunities for wealth gains,” NAR’s Yun told the Financial Times, echoing a disturbing trend we have underscored frequently in articles such as “Private Equity Partners Target $5 Billion in Rental Houses” (27 Jul 2021).