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Prices Surge Broadly Across the Massive Service Sector and Companies Are Able to Pass On these Higher Prices

Prices Surge Broadly Across the Massive Service Sector and Companies Are Able to Pass On these Higher Prices

The entire mindset has changed.

Services are about two-thirds of the economy. During the Pandemic, discretionary services such as travel and entertainment have been hard hit, and consumer spending on services in February was still down 5.2% from a year ago. But the services sector is enormous, ranging from healthcare to tech, and demand has been strong in many segments, and is coming back in others. Amid backlogs and shortages, input prices are soaring and companies are able to pass on those higher prices. The Fed might refuse to acknowledge it, but everyone else is seeing it.

“The biggest concern is inflation, with price gauges hitting new survey highs in March as demand often exceeded supply for a wide variety of goods and services,” reported IHS Markit in its Services PMI today.

“On the price front, input costs soared in March. The rate of inflation accelerated to the fastest since data collection for the services survey began in October 2009,” the report said.

“Subsequently, firms sought to pass on higher costs to clients through a sharper rise in selling prices,” the report said.

“A number of companies also stated that stronger client demand allowed a greater proportion of the hike in costs to be passed through. The resulting rate of charge inflation was the quickest on record,” the report said.

These types of price pressures in the services sector were also reported today by the Institute of Supply Management’s broad ISM Services Report on Business, whose index for prices paid for materials and services increased in March at the steepest rate since 2008.

…click on the above link to read the rest of the article…

wolfstreet, wolf richter, inflation, consumer prices

Look to Prices, Not Official Metrics, for Inflation’s “Smoking Gun”

Look to consumer prices to see where gold and silver are headed

As worries about currency erosion and inflation abound, the question of how to measure these crucial benchmarks has become a cornerstone of the debate. The Federal Reserve’s insistence that inflation is being kept in check and below its annual targeted rate of 2% seems impossible considering the oceans of money poured into the economy. Economics 101 teaches us that, when money supply goes up without a corresponding increase in goods for sale, prices must rise. It’s virtually a law of nature.

Statements by officials have given rise to even more red flags, whether one refers to the Fed’s willingness to let inflation run rampant or former U.S. Treasury Secretary Lawrence Summers’s warning that the Fed would “set off inflationary pressures of a kind we have not seen in a generation.”

But how can the average citizen know whether there has been a sudden spike in inflation, and just how quickly their purchasing power is wasting away?

FAO Food Price Index

The FAO Food Price Index (FFPI) averaged 116.0 points in February 2021, 2.8 points (2.4 percent) higher than in January, marking the ninth month of consecutive rise and reaching its highest level since July 2014. source

 

…click on the above link to read the rest of the article…

birch gold group, inflation, price inflation, food price inflation, fed, us federal reserve, consumer prices

Inflation Is Spreading Broadly into the Economy. Amid Surging Costs, Companies Raise Prices, and Customers Pay them, Despite Weak Economy, 10 Million Missing Jobs

Inflation Is Spreading Broadly into the Economy. Amid Surging Costs, Companies Raise Prices, and Customers Pay them, Despite Weak Economy, 10 Million Missing Jobs

“Not only have the last two months seen supply shortages develop at a pace not previously seen in the survey’s history, but prices have also risen due to the imbalance of supply and demand.”

The signs of inflation building up in the economy are now everywhere. IHS Markit, in its release of the Flash PMI with data from companies in the services and manufacturing sectors, added to that pile of evidence.

For companies, inflation happens on two sides: what they are having to pay their suppliers, and what they can get away with charging their own customers, which may be consumers, governments, or other companies.

And increasingly, companies are able to pass higher input prices on to their customers – meaning, their customers are not totally balking at paying higher prices and they’re not switching to other sources to dodge those price increases. That’s a mindset that nurtures inflation.

This PMI data is based on what executives said about their own companies (names are not disclosed) and the conditions they face in the current month. No quantitative measures or dollar amounts are involved.

And this is what they said about their two aspects of inflation, according to Markit:

On surging input prices:

  • “Inflationary pressures intensified as supplier delays and shortages pushed input prices higher.”
  • “The rate of input cost inflation [in January] was the fastest on record (since data collection began in October 2009), as soaring transportation and PPE costs were also noted.”
  • Amid stronger expansions in output and new orders, manufacturers experienced “significant supply chain delays, raw material shortages, and evidence of stockpiling at goods producers” that “pushed input prices up.”

…click on the above link to read the rest of the article…

Consumer Prices Soar By Most In 11 Years In June On Rebound In Fuel Costs

Consumer Prices Soar By Most In 11 Years In June On Rebound In Fuel Costs

After three months of ‘deflation’, consumer prices were expected to rebound strongly in June and it did, with headline CPI beating expectations (+0.6% MoM vs 0.5% exp). That is the biggest monthly jump since June 2019

Source: Bloomberg

Both Goods (Ex-Energy) and Services (ex-Energy) CPI growth slowed on a YoY basis…

Source: Bloomberg

The driver of the headline beat and surge in CPI was soaring motor fuel costs – up 12% MoM…

Source: Bloomberg

Will The Fed shrug this off as ‘transitory’?

Inflation Surges In October; Media Blames Gas Prices

Inflation Surges In October; Media Blames Gas Prices

A key measurement of inflation, The Consumer Price Index, rose 2.5% in October from a year earlier.  The inflation was linked to rising gas prices by the media, but there’s more to it than just the cost of fuel. Rising inflation is actually also likely tied to the deficit, rising interest rates, and the national debt.

According to a report by Market Watch, Americans paid more in October for gas, rent and used vehicles, triggering the biggest increase in consumer inflation in nine months. There was an increase in the cost of living over the past 12 months as well.  That jumped to 2.5% from 2.3%. The rate of inflation is still below a six-year high of 2.9% set three months ago, however.

Even though the price of gasoline played a role on the rising inflation, the cost of rent, used cars and trucks, medical care, home furnishings, and car insurance also increased and all of these are major household expenses. The worst news, perhaps, is that after adjusting for inflation, hourly wages slipped 0.1% in October. Wages are up a mild 0.7% in the past year, according to CNBC.

This rise in inflation will likely keep the Federal Reserve on their current path of increasing interest rates as well.  The United States’ central bank left interest rates unchanged last Thursday, but it is still expected to increase borrowing costs in December for a fourth time this year. In its statement after last week’s policy meeting, the Fed noted that annual inflation measures “remain near 2 percent.”

Even though most prices rose, prices for new motor vehicles dropped 0.2 percent last month and communications costs fell too. Prices for recreation and personal care products also decreased slightly. However, the minuscule decrease in vehicle prices won’t last long as the trade war with China is still in effect.

…click on the above link to read the rest of the article…

Venezuela Knocks Three Zeros Off Its Currency to Halt Hyperinflation

Redenomination is Venezuela’s sorry story of the day. It won’t work.

In a worthless attempt to halt hyperinflation, Venezuela Deletes Three Zeros From Its Failing Currency.

Socialist Venezuela is going through a crisis that has left people struggling to pay for food and find medicines. Prices are being influenced by a black-market exchange rate that rises by the day and is currently five times the nearly inaccessible official rate.

President Nicolás Maduro late Thursday briefly outlined his monetary rescue plan. In a country where a dozen eggs can cost 250,000 bolivars ($5) amid worsening inflation, he would chop three zeros off the currency — arguably bringing the price for those eggs down to 250.

By June 2, under Maduro’s plan, new bolivars with lower denominations would be circulated — but old ones, with denominations as high as 100,000, would remain valid. It would leave vendors charging two prices — one for old bills, the other for the redenominated bolivar.

Empty Shelves

Merchants are arrested if they charge too much for food. The result is no food.

Loot or Die

The Guardian reports ‘We loot or we die of hunger’: food shortages fuel unrest in Venezuela.

…click on the above link to read the rest of the article…

Mnuchin’s Wrong: Here’s Why Investors Should Be Very Worried About Inflation

Despite Treasury Secretary Steven Mnuchin’s bizarre insistence that there’s no connection between consumer-price inflation and rising energy prices and wages, these factors – plus a spate of others – are forcing some food companies to consider raising prices on goods from chicken to cereal, according to Reuters.

One of these factors, as Reuters explores in a wide-ranging feature published on Monday, involves US trucking and railroad operators foisting higher shipping rates on customers like General Mills Inc. and Hormel Foods Corp.

According to Reuters, transportation costs are climbing at double the rate of inflation.

These increases are catching food companies off guard. Struggling railroads and trucking companies haven’t expanded their capacity, choosing instead to focus on cost cuts – much to Wall Street’s delight.

Interviews with executives at 10 companies across the food, consumer goods and commodities sectors reveal that many are grappling with how to defend their profit margins as transportation costs climb at nearly double the inflation rate.

Two executives told Reuters their companies do plan to raise prices, though they would not divulge by how much. A third said it was discussing prospective price increases with retailers.

The prospect of higher prices on chicken, cereal and snacks costs comes as inflation emerged as a more distinct threat in recent weeks. The U.S. Labor Department reported earlier this month that underlying consumer prices in January posted their biggest gain in more than a year.

As US economic growth has revved up, railroads and truck fleets have not expanded capacity to keep pace – a decision applauded by Wall Street. Shares of CSX Corp, Norfolk Southern, and Union Pacific Corp have risen an average 22 percent over the past year as they cut headcount, locomotives and rail cars, and lengthened trains to lower expenses and raise margins.

…click on the above link to read the rest of the article…

Inflation Coming? How About Deflation?

Economists expect higher inflation based on rising producer prices. But will producer prices feed consumer prices? When?

Do producer prices eventually feed into consumer prices? If so, what’s the lead or lag time?

The Wall Street Journal article Why the Inflation Picture Looks Starkly Different for Businesses and Consumers got me thinking about these questions and I do not believe they came up with the correct answer.

This month consumers said they expected a 2.7% rise in inflation over the next year, a level unchanged since December, according to the University of Michigan’s latest sentiment survey.

Other survey data indicate businesses are feeling inflationary pressures. Take, for instance, the rising percentage of executives in the Institute for Supply Management’s manufacturing survey who say they’re paying higher prices for materials: In January, 46.6% reported higher prices, up from 42% a year earlier.

Households’ inflation expectations tend to lag behind the behavior of inflation itself, which means as consumer prices rise, inflation expectations for this group should rise, too, said Michael Pearce, economist at Capital Economics.

“We’ve seen pickups in producer-price inflation before that haven’t really fed through to higher consumer prices, but there are good reasons to expect that the story this time around could be a bit different,” Mr. Pearce said. This, he said, is because a whole slew of factors are converging to put pressure on business prices and ultimately consumer inflation, a divergence from some past patterns when oil was the main driver.

Lagging the Leader or Noise?

The above chart is easily creatable in Fred. Here is a longer term view.

Cope PPI vs Core CPI

The overall correlation seems easy to spot but it was far stronger prior to 1988. Since then movement seems somewhat random.

I expected the divergences to be oil-related but they do not all seem to be.

…click on the above link to read the rest of the article…

Fed Warns Inflation Has Arrived: Philadelphia, New York Fed Prices Paid Soar

Just in case the economic data appeared to be coming in as too hot in recent days, today’s two key regional Fed manufacturing indicators sent conflicting signals, with the New York Fed survey sliding from 17.70 to 13.1, and missing expectations of 17.50, while the Philadelphia Fed rose from 22.2 to 25.8, beating exp. of a dip to 21.6

The commentary from both regional Feds was optimistic, although NY conceded a slowdown in January:

Business activity continued to expand in New York State, according to firms responding to the February 2018 Empire State Manufacturing Survey. The headline general business conditions index fell five points to 13.1, suggesting a somewhat slower pace of growth than in January.

The New York internals, however, were good, especially when it comes to labor: number of employees rose to 10.9 vs 3.8, while work hours rose to 4.6 vs 0.8. Meanwhile, inventory fell to 4.9 vs 13.8. Unlike current conditions, optimism rose with six-month general business conditions up to 50.5 vs 48.6. A potential bottleneck was noted in future delivery times at a record high in Feb, up from 10.9 to 15.3

The Philly Fed meanwhile was stronger across the board:

Results from the Manufacturing Business Outlook Survey suggest that the region’s manufacturing sector continues to expand in February. The indexes for general activity, new orders, and employment were all positive this month and increased from their readings last month. Price increases for inputs were more widespread this month, according to the respondents. The survey’s future indexes, reflecting expectations for the next six months, suggest continued optimism.

Here, too, the internals were strong:

  • New orders rose to 24.5 vs 10.1
  • Employment rose to 25.2 vs 16.8
  • Unfilled orders rose to 14.5 vs -1.8
  • Shipments fell to 15.5 vs 30.3
  • Delivery time fell to 4.5 vs 6.1

There were some declines:

  • Inventories fell to -0.9 vs 9.4
  • Prices received fell to 23.9 vs 25.1
  • Average workweek fell to 13.7 vs 16.7

…click on the above link to read the rest of the article…

The Big Reversal: Inflation and Higher Interest Rates Are Coming Our Way

The Big Reversal: Inflation and Higher Interest Rates Are Coming Our Way

This interaction will spark a runaway feedback loop that will smack asset valuations back to pre-bubble, pre-pyramid scheme levels.

According to the conventional economic forecast, interest rates will stay near-zero essentially forever due to slow growth. And since growth is slow, inflation will also remain neutral.

This forecast is little more than an extension of the trends of the past 30+ years: a secular decline in interest rates and official inflation, which remains around 2% or less. (As many of us have pointed out for years, the real rate of inflation is much higher–in the neighborhood of 7% annually for those exposed to real-world costs.)

The Burrito Index: Consumer Prices Have Soared 160% Since 2001 (August 1, 2016)

Inflation Isn’t Evenly Distributed: The Protected Are Fine, the Unprotected Are Impoverished Debt-Serfs (May 25, 2017)

About Those “Hedonic Adjustments” to Inflation: Ignoring the Systemic Decline in Quality, Utility, Durability and Service (October 11, 2017)

Be Careful What You Wish For: Inflation Is Much Higher Than Advertised (October 5, 2017)

Apparently unbeknownst to conventional economists, trends eventually reverse or give way to new trends. As a general rule, whatever fundamentals are pushing the trend decay or slide into diminishing returns, and new dynamics arise that power a new trend.

I’ve often referred to the S-Curve as one model of how trends emerge, strengthen, top out, weaken and then fade. Trends often change suddenly, as in the phase-shift model, in which the status quo appears stable until hidden instabilities cause the entire “permanent and forever” status quo to collapse in a heap.

The Bank for International Settlements (BIS) recently issued a report claiming that Demographics will reverse three multi-decade global trends. Here’s a precis of the case for a globally aging populace and a shrinking workforce to reverse the downward trends in inflation and interest rates: New Study Says Aging Populations Will Drive Higher Interest Rates (Bloomberg)

…click on the above link to read the rest of the article…

Whatever Happened to Inflation after All This Money Printing? It Has Arrived!

Whatever Happened to Inflation after All This Money Printing? It Has Arrived!

Workers, bondholders, savers get sacked. So what would Yellen do?

Consumer prices surged 0.6% in January from December, double the consensus forecast of a 0.3% rise. The sharpest monthly increase since February 2013, according to the Bureau of Labor Statistics.

Energy prices jumped 4% month over month, including gasoline which jumped 7.8%. Food prices edged up 0.1%. Within this group, “food at home” was unchanged, but prices for “food away from home” – restaurants, taco trucks, and the like – rose 0.4%. In just one month, the prices of apparel rose 1.4%, of new vehicles 0.9%, of auto insurance 0.8%, of airline fares 2.0%. Shelter rose “only” 0.2%, as the national numbers are now feeling the downward pressure on rents in some of the most expensive rental markets in the US.

This chart  shows just how sharp that jump in monthly price increases is, compared to recent years:

Compared to January a year ago, consumer prices as measured by CPI-U surged 2.5%, after having already jumped 2.1% in December. The rate of inflation has now accelerated for the sixth month in a row. It has surged one full percentage point over the past four months and hit the highest rate since March 2012:

So-called core inflation – which excludes food and energy – jumped 2.3% in January from a year ago. The consensus expected 2.1%. So you can’t just blame the rising costs of energy. This “core” measure of price increases has been above 2% since November 2015. Even during the Financial Crisis, when overall year-over-year CPI dipped briefly into the negative, core CPI remained in positive territory.

However much these inflation measures may understate actual increases in the costs of living that people experience in their daily lives, even those understated measures are now beginning to exude a lot of heat. And afterwards, the consensus will say that no one saw this coming.

…click on the above link to read the rest of the article…

According To Deutsche Bank, The “Worst Kind Of Recession” May Have Already Started

According To Deutsche Bank, The “Worst Kind Of Recession” May Have Already Started

One week ago, Deutsche Bank’s Dominic Konstam unveiled, whether he likes it or not, what the next all too likely step will be as central bankers scramble to preserve order in a world in which monetary policy has all but lost effectiveness: “It is becoming increasingly clear to us that the level of yields at which credit expansion in Europe and Japan will pick up in earnest is probably negative, and substantially so. Therefore, the ECB and BoJ should move more strongly toward penalizing savings via negative retail deposit rates or perhaps wealth taxes.”

Many were not happy, although in reality the only reason why the DB strategist proposed this disturbing idea is because this is precisely what the central banks will end up doing.

Today, he follows up with an explanation just why the central bankers will engage in such lunatic measures: quite simply, he thinks that economic contraction is now practically assured – and may have already begun – for a simple reason: contrary to popular belief, this particular “expansion” will die of old age after all, and won’t even need the Fed’s intervention to unleash the next recession (if not depression).

There is an old saying amongst market watchers that economic expansions do not die of old age. Rather, during the course of the business cycle dynamics emerge that threaten to become unacceptable from a policy perspective. In the context of economic expansion, that dynamic has been inflation. The conventional pattern has been that as expansions mature, demand for labor outstrips the available supply, creating upward pressure on wages. In the presence of pricing power, higher wages are passed along to end consumers through higher prices.

…click on the above link to read the rest of the article…

This Is The End: Venezuela Runs Out Of Money To Print New Money

This Is The End: Venezuela Runs Out Of Money To Print New Money

Back in February, when we commented on the unprecedented hyperinflation about the be unleashed in the Latin American country whose president just announced that he would expand the “weekend” for public workers to 5 days

… we joked that it is unclear just where the country will find all the paper banknotes it needs for all its new physical currency. After all, central-bank data shows Venezuela more than doubled the supply of 100-, 50- and 2-bolivar notes in 2015 as it doubled monetary liquidity including bank deposits. Supply has grown even as Venezuela has fewer U.S. dollars to support new bolivars, a result of falling oil prices.

This question, as morbidly amusing as it may have been to us if not the local population, became particularly poignant recently when for the first time, one US Dollar could purchase more than 1000 Venezuela Bolivars on the black market (to be exact, it buys 1,127 as of today).

And then, as if on cue the WSJ responded: “millions of pounds of provisions, stuffed into three-dozen 747 cargo planes, arrived here from countries around the world in recent months to service Venezuela’s crippled economy. But instead of food and medicine, the planes carried another resource that often runs scarce here: bills of Venezuela’s currency, the bolivar.

The shipments were part of the import of at least five billion bank notes that President Nicolás Maduro’s administration authorized over the latter half of 2015 as the government boosts the supply of the country’s increasingly worthless currency, according to seven people familiar with the deals.

More planes were coming: in December, the central bank began secret negotiations to order 10 billion more bills which would effectively double the amount of cash in circulation. That order alone is well above the eight billion notes the U.S. Federal Reserve and the European Central Bank each print annually—dollars and euros that unlike bolivars are used world-wide.

…click on the above link to read the rest of the article…

JPM, ECB Hint At Arrival Of “Helicopter Money” In Europe Following Next “Significant Downturn”

JPM, ECB Hint At Arrival Of “Helicopter Money” In Europe Following Next “Significant Downturn”

Moments ago, ECB governing council member and Bank of Italy governor Ignazio Visco had some very troubling comments.

He said that while helicopter money is not currently part of the discussion in the Governing Council that “no policy tool within our mandate can or should be dismissed a priori.” The reason for this startling admission is “the importance of expectations of low inflation in determining wage outcomes, and thus giving rise to second- round effects, may be increasing.”

He cited Italy’s recently signed collective contracts where “it was agreed that parts of future pay rises will be revised downwards in the event that the inflation rate falls short of current forecasts” adding that a “a generalized adoption of this type of contract would significantly decrease the rate of growth of wages and this would in turn be reflected in the dynamics of consumer prices.”

He went on to defend existing monetary policy which has so far only resulted in savings hoarding, ongoing deflation and a slammed banking sector, saying that “Regarding Italy, the effects are estimated to be somewhat stronger: absent the monetary impulse, the Italian recession would have ended only in 2017; inflation would have remained negative for the whole three-year period.”

But back to helicopter money: Visco also said that: “such an extreme measure would undoubtedly be subject to operational and legal constraints.

Is the ECB really this cloase to helicopter money? It appears so, because as he notes “the redistributive implications and the close ties with fiscal policy would all make it very complex, all the more so in the euro area given its institutional framework.” He concluded that a discussion on the measure “is noteworthy, not much per se, but because it underlines the concern that monetary policy is left to act in isolation.”

…click on the above link to read the rest of the article…

Hyperinflating Venezuela Used 36 Boeing 747 Cargo Planes To Deliver Its Worthless Bank Notes

Hyperinflating Venezuela Used 36 Boeing 747 Cargo Planes To Deliver Its Worthless Bank Notes

The weeks ago, when we showed “What The Death Of A Nation Looks Like: Venezuela Prepares For 720% Hyperinflation“, we said that after looking at a chart of Venezuela’s upcoming hyperinflation…

…  a hyperinflation in which the soaring stock market has failed to keep pace with the collapsing currency, thereby mocking all erroneous thought experiments that under hyperinflation being long the stock market is a sure hedge to currency destruction…

… we joked that it is unclear just where the country will find all the paper banknotes it needs for all its new currency.

After all, central-bank data shows Venezuela more than doubled the supply of 100-, 50- and 2-bolivar notes in 2015 as it doubled monetary liquidity including bank deposits. Supply has grown even as Venezuela has fewer U.S. dollars to support new bolivars, a result of falling oil prices.

This question, as morbidly amusing as it may have been to us if not the local population, became particularly poginant yesterday, when for the first time, one US Dollar could purchase more than 1000 Venezuela Bolivars on the black market.

And, as if on cue, the WSJ answered. As it turns out we were not the only ones wondering how the devastated “socialist paradise” gets its exponentially collapsing paper currency, which in just the past month has lost 17% of its value.

The answer: 36 Boeing 747s.

From the WSJ:

Millions of pounds of provisions, stuffed into three-dozen 747 cargo planes, arrived here from countries around the world in recent months to service Venezuela’s crippled economy.

But instead of food and medicine, the planes carried another resource that often runs scarce here: bills of Venezuela’s currency, the bolivar.

 

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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