Inflation du Jour

A very heated discussion about inflation took place on Silicon Investor on Wednesday.

A person I respect very much posted, “More inflation du jour. Coke just raised orange juice prices, and Kellogg’s cereal.”

The above was in reference to a article entitled, “Many Price Increases Starting to Tug at People’s Wallets”:
“While prices at the gas pump get a lot of attention, other increases are pulling at Americans’ pocketbooks from a variety of directions.

“‘We see it daily as far as everything we need for the kids; groceries, the little one still in diapers; anything that has to do with the house,’ said Mary Ann Ray, 32, a registered nurse and mother of two in suburban Union Township, just east of Cincinnati.

“Besides spending $10-15 more to fill up her minivan than she did a year or so ago, she ticks off a litany of other higher prices squeezing the once-comfortable household budget of her and her husband, the product-development director for an educational software company. They include over-the-counter drugs, delivery pizzas, baby formula.

“‘It’s all the little things,’ she said. ‘What I see is that you get your typical raises for work, but it seems like everything gets more expensive’…

“And more price increases are coming.

“In summer earnings reports, company after company has reported plans to pass along some higher costs in pricing of some or most of its products, including Energizer Holdings Inc. batteries, Eastman Kodak Co. film, Whirlpool Corp. appliances, the Clorox Co. household cleaners, Anheuser-Busch Cos. Inc. beer, and meals in some Buffalo Wild Wings Inc. restaurants…

“Executives of Kellogg Co., maker of popular cereals such as Rice Krispies and frozen foods such as Eggo waffles, told analysts July 27 that the company is absorbing $180 million this year in additional costs, mainly for energy, sugar, and wheat. While strong sales growth helped boost Kellogg’s second-quarter profit 3%, the company said it needed to boost some prices.

“Some price increases announced this summer, such as airline fares, took effect immediately, but shoppers will see others, such as Kellogg’s, going up on store price tags late this year or early next year.

“Consumers ‘will have to cut back on something,’ said James Brock, a Miami University economics professor. ‘Then you raise the bigger question of, OK, if that happens, will that create a slump in the economy?'”
In reading the article, I see that Kellogg’s is actually struggling to pass on those costs. I have talked about this before. Please consider “The Psychology of Deflation” and “Intermediate vs. Finished PPI.”

If sugar and energy are soaring, why has Kellogg’s delayed passing on price hikes? Is it because it can’t?

As for airfares, please consider “Hawaii Airfares Getting Lower!!”

“As each day goes by, it seems that the fall airline fares continue to get better. Northwest is offering on flights 221 and 222 for travel from now to Nov. 13 airfare as low as $246 round-trip. Hopefully, some of you will be able to take advantage of this fare. Also, United lowered its rates from most cities last week. I know many of you are in the Bay Area, so hurry up and call us!!”

Roundtrip to Hawaii goes for $246. Can United possibly be making any money on that?

The problem, it seems, is that inflationists keep looking at prices of everything that is going up, while ignoring the prices of everything that has fallen.

Now that home prices are falling like a rock (taking into account incentives, interest rate buy-downs, etc.), inflation alarmists now look at owners’ equivalent rent, which is rising. Which is it? Are rising home prices inflationary, are rising rents inflationary, or do we simply do what all inflationists do — that is, look at everything that is rising while ignoring everything that is falling?

I pointed that out (in a slightly different way), but was challenged with a sarcastic reply by someone other than the original poster: “Yeah, why track the national price of OJ? So much better to track the daily specials at the Danville Bennigan’s — the nation’s true inflation barometer.”

It is, of course, nonsense statements like the above that make it very difficult to carry out any meaningful discussion on inflation versus deflation with inflationists. For starters, Danville, Ill., does not have a Bennigan’s to the best of my understanding, and even if it did, those price cuts were national. Furthermore, price cuts were made at many restaurants, not just Bennigan’s, because of falling demand. This is a critical time-preference change that I talked about.

I was also challenged by another person with the following question: “Are you saying there is a new trend now and that we are in a new era where for years to come, we will see lower and lower energy prices and lower and lower food prices??? These would be signs of deflation and I would want to know about it.”

That, at least, was a serious question. The problem, of course, is that inflationists just do not get it. I discuss prices only in self-defense, and as little as possible. Prices are not the problem, and interest rates in the U.S. are not the solution.

Let me expound upon that with an answer to the above question: I suspect we are NOT in an environment where for years to come we will see lower energy prices. That is, of course, why I have pretty much kept my mouth shut about falling gasoline prices. But when confronted with the absurdity of “inflation du jour” in watching rising OJ prices as gasoline and housing prices fall, I had to speak up.

Let’s take a step back. I assume most are on board with Peak Oil. If so, exactly what can the U.S. do about rising oil prices in the face of Peak Oil with rising demand from China, India, and other places?

Along similar lines, can the Fed control hurricanes and tropical storms hitting Florida or the Gulf Coast? If not, can the Fed reasonably control the price of orange juice or natural gas?

It seems that many think the Fed is an all-powerful entity that can and SHOULD attempt to prevent oil from rising because of Peak Oil, and OJ from rising after hurricane damage, and copper from rising in spite of the demand for it from China.

Please consider this: India’s “Money Supply Growth Nearing 20% Mark”:
“Even after resorting to monetary tightening by hiking benchmark interest rates, the money supply growth continues unabated, and is inching toward the 20% mark. This is the highest growth witnessed since 1994-95. Such high money supply could cause further inflationary pressures in the economy.

“As per the latest figures, the year-on-year (y-o-y) growth in M3 — a broad indicator of money in the system — was 20% as of Aug. 18. All three components — currency with the public, demand deposits, and time deposits — have recorded a strong growth.”
It seems that inflationists believe the all-powerful Fed can control the demand for copper and oil in China and India, as well. That, presumably, is what people propose when they suggest the Fed keep hiking to stop “inflation.”

The question, of course, is can the Fed dictate what happens in India or China or anywhere else? Can the Fed control Peak Oil, hurricanes, or drought?

Would it make sense even to try? The problem is not simply rising prices. Take copper, for instance. No new mines have been brought on line recently, in spite of soaring demand from China and other places. Why? Because copper prices were simply too low compared with the startup costs, that’s why. Now copper prices have exploded because of rising demand in China, India, Brazil, and the U.S. housing market, so is the correct solution to raise interest rates to suppress the price of copper to the point that no new mines will come online still?

That is exactly what inflationists want to do, but it cannot be done. Even IF the U.S. were a closed society, such policies would be silly. In the face of a global economy, anyone who expects the Fed to be able to control the global demand for commodities via interest rate policies without causing a worldwide depression is simply nuts.

The solution, of course, is to ignore prices. Inflation, by proper definition, is expansion of money supply and credit. The problem in the U.S. was an oversimulative advance of credit, lower lending standards, an unsupported housing boom, etc.

If someone wants to argue that interest rates need to be hiked to slam the door shut on credit expansion, at least it is an argument that I can understand.

If someone tells me that interest rates need to be hiked because of rising oil prices, my response is simple:

· It is not the Fed’s job to set the global price of oil, corn, copper, cotton, or sugar
· If the Fed minded credit, the rest would take care of itself
· If the Fed were abolished and free market forces set interest rates, the mess we are in with this housing bubble would never have gotten so big in the first place.

I find it ironic that there is more screaming now about price rises at a time when people are scared out of their minds about falling home prices, gasoline prices are finally starting to fall, prices at restaurants are falling, and airfares are dropping.

By the way, even though I think inflation is an expansion of money supply and credit, let me go out on a limb and talk prices:

1. I predict falling education costs.
2. I predict falling medical costs.
3. I predict falling equity prices.
4. I predict falling home prices.
5. I predict falling prices at the movies.
6. I predict falling prices at nail salons.
7. I predict falling prices at restaurants.
8. I predict falling prices on other goods and services.
9. I predict the dollar will not make and hold a new low.
10. Energy is tougher. I have no idea how nuts Bush might get in regards to Iran, or for that matter, how nuts Iran might get, or what Israel may or may not do in the interim, but if nothing explosive happens, I predict stable-to-falling prices on energy, as well (but only for the intermediate term).

Those calls are year over year from this point forward. Now that everyone is focused on inflation (even though few understand what it really is), it is time to look elsewhere. I boldly predict inflation (with prices to follow) heads south.

Let’s see how I do.

September 8, 2006

The Daily Reckoning