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US Consumer Prices Soar At Fastest In 39 Years, Real Wages Tumble For 9th Straight Month

US Consumer Prices Soar At Fastest In 39 Years, Real Wages Tumble For 9th Straight Month

Consensus was convinced – with barely any outliers – that this morning’s consumer price index would print with an astonishing 7.0% YoY (and notably 7 of the last 9 releases have come in above consensus) and they nailed it with the 7% print at its highest since June 1982 (when ET was launched in the US)…

Source: Bloomberg

That is the 19th straight monthly rise in headline CPI and Core CPI also surged to its highest since Feb 1991 (printing hotter than expected at +5.5% YoY)

Source: Bloomberg

Under the hood, commodities, shelter, and new-and-used cars and trucks saw prices jump the most. Energy actually saw a modest 0.4% retracement (that will not be the case in January)…

Source: Bloomberg

The cost of putting a roof over your head is accelerating once again. Shelter inflation rises to 4.13% Y/Y from 3.84%, the highest since Feb 2007…

In fact, while Services inflation rose to +3.7% – its highest since Jan 2007 – Goods inflation soared 10.7% YoY – its highest since May 1975…

Source: Bloomberg

Finally, and perhaps most importantly for Main Street, real average hourly earnings fell (down 2.4% YoY) for the 9th straight month…

Source: Bloomberg

So the next time a politician tries to tell you to be grateful that your wages are going up or you can move to a new higher paying job, just remind him that the surge in the cost of living is outpacing wage gains, thanks to The Fed’s money-largesse and Congress’ lockdown policies and helicopter money have crushed the quality of life for millions.

#219. The unravelling begins

#219. The unravelling begins

THE REALITY OF SCARCITY, THE SCARCITY OF REALITY

In nineteenth-century England, pictures of great events and famous personages could be purchased “penny-plain or tuppence-coloured”.

Where the world economy is concerned, the price of flattering colouration has soared into the trillions, but the value of a “penny-plain” view has never been higher.

The penny-plain picture now, of course, is that a vast gap has opened up between the consensus expectation of continuity and the hard reality of a post-growth economy. This gap is the counterpart of the chasm that exists between the ‘real’ economy of goods and services and the ‘financial’ economy of money and credit.

Our understanding of these dissonances sets an outline programme for ongoing analysis. The best routes to effective interpretation are those which (a) compare reality with perception, and (b) calibrate the relationships between the ‘two economies’ of money and energy. In the coming months, the aim here will be to add interpretive and statistical detail to the picture that is emerging as the aquatint wash of delusion fades away.

The divergence between expectation and reality isn’t – in itself – a new development. Many of us have long known that, over a very extended period, most economic “growth” has been a cosmetic product of breakneck and hazardous monetary expansion, that the underlying economy has been faltering, and that the confidence placed in ‘continuity’ lacks a basis in fact.

We can go further, recognizing that even the simulacrum of “growth” can’t last much longer, that the real prices of assets are destined to fall sharply in a context of broader financial distress, and that the balance of political power might be poised to shift, perhaps in a direction that, once upon a time, used to be called “left”.

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

Two Big Myths About Why Energy Prices Are Rising

Photo: Bridget Bennett/Bloomberg via Getty Images

The global economic recovery is running low on fuel. Chinese factories have been flickering on and off as Beijing rations electricity. Britons have been parking in petrol lines as their nation’s pumps run dry. Americans have turned on their president as spiking gas prices eat their wage gains. And the entire northern hemisphere is sweating the cost of keeping warm this winter.

High energy prices have long been the bane of the post-2020 recovery. But as the days grow shorter and the nights get colder, their salience is steadily rising. In recent days, Democrats and Republicans alike have called on Joe Biden to take immediate action to reduce the cost of energy. The former implored the president to bring down gas prices by tapping the nation’s emergency oil reserves. The latter chastised Biden for personally driving up energy prices by blocking new oil and gas drilling on federal land.

Meanwhile, fossil-fuel lobbyists and eco-socialists alike are casting the energy crunch as a byproduct of the world’s (slow and uneven) green transition. In their account, investors have been spurning new oil and gas production out of fear of future regulations, while renewables have failed to scale up fast enough to compensate. For oil barons, this narrative functions as an argument against stringent carbon pricing. For Marxists, it offers hope for an impending crisis of capitalism, as the old energy system dies and the new one struggles to be born.

Global energy markets contain multitudes. The price of oil internalizes myriad forces, from the financial to the macroeconomic to the geopolitical to the meteorological. So, one can tell a wide range of true stories about the energy crisis of 2021…

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

Inflationary Storm Forces Unilever To Raise Prices Fastest In Seven Years 

Inflationary Storm Forces Unilever To Raise Prices Fastest In Seven Years 

Rising consumer prices are not going away. The latest example of this is from British multinational consumer goods company Unilever PLC who announced Thursday soaring commodity prices had forced it to raise prices the most in years.

The multinational consumer goods company that produces food, beverages, cleaning agents, and personal care products said it raised prices 4.1% in the third quarter, the fastest in seven years, pushing soaring material costs onto consumers, which compensated for a drop in shipments to Southeast Asia during COVID outbreaks.

Unilever CEO Alan Jope said inflationary pressures would linger for at least another 12 months:

“Our current view of the future is that peak inflation will be in the first half of 2022, and it will moderate as we move towards the second half,” Jope said in a Bloomberg Television interview.

“We continue to take pricing responsibly, and that’s in relation to the very high levels of inflation we’re seeing,” CFO Graeme Pitkethly told reporters. He said that inflation in the consumer goods industry is in the “high teens,” with Unilever mitigating some of the inflationary impacts due to its negotiating power.

Pitkethly warned inflation could surge even higher next year, and the company would have to deal with spot prices as its hedges expire. He said 20 billion euros in raw materials and packaging costs and 3 billion euros worth of logistical costs had been impacted inflation.

Rivals, such as Nestlé warned Wednesday that “inflation costs are rising faster than we can roll forward through pricing . . . The situation has not improved. If anything, we are seeing further downsides compared to what we told you in the summer.”

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

Yet another worry: Price of ship fuel is now highest since 2014

Yet another worry: Price of ship fuel is now highest since 2014

Bunker surcharges on the rise for shippers of containerized cargo

Commodity prices are surging around the globe, so it should come as no surprise: Marine fuel is getting a lot more expensive. That’s bad news for ship operators on the cost side, and, in the container business, yet another headache for cargo shippers.

Marine bunker prices are “soaring,” said Alphatanker on Thursday. “This has not just impacted 3.5% [high-sulfur fuel oil or HSFO] but also 0.5% VLSFO [very low sulfur fuel oil].

“There are expectations that crude, and therefore marine fuel, could move higher in the coming weeks as oil markets tighten further,” warned Alphatanker, adding, “This will undoubtedly clip gains in tanker earnings.”

All ship categories, not just tankers, are taking a cost hit. On Thursday, the S&P Global Platts T4 index estimated that a Capesize (a dry bulk ship with capacity of around 180,000 deadweight tons) burning VLSFO was spending $24,596 per day on fuel.

Ships equipped with exhaust-gas scrubbers are still able to burn cheaper HSFO under IMO 2020, a regulation that went into force for all commercial ships on Jan. 1, 2020. According to the Platts’ T4 Thursday assessment, scrubber-equipped Capes were paying $22,815 per day for fuel.

Why pricing is up and where it’s going

“The main driver for bunker pricing is the price of oil — that’s the key,” said Martyn Lasek, managing director of Ship & Bunker, a company that provides pricing data. “If you look at the relationship between Brent and VLSFO, it’s now pretty solid. There’s an established price trend.”

American Shipper asked Richard Joswick, head of global oil analytics at S&P Global Platts, where the price of crude — and thus ship fuel — is going.

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

Who determines prices?

Who determines prices?

One of the consequences of the response to the pandemic and the disruption from Brexit is that labour shortages are appearing across the low-paid sectors of the economy.  So much so that even the metropolitan liberal Guardian has begun to wonder whether the benefits of higher wages for the low-paid might outweigh the cost of having to pay more for a plumber or an au pair.  As John Harris puts it:

“For decades, large swathes of the labour market have been run on the assumption that there will always be sufficient people prepared to work for precious little. But here and across the world, as parts of the economy have been shut down and furlough schemes have given people pause for thought, the idea that they need not stay in jobs that are exploitative and morale-sapping has evidently caught on.

“In the UK, meanwhile, Brexit remains a disastrous and chaotic project – but, among its endless and unpredictable consequences, leaving the EU has cut off employers’ access to a pool of people who were too often exploitable. Time has thereby been called on one of the ways that our dysfunctional labour market was prevented from imploding.”

Harris points to sectors of the economy – mostly low-paid – where employers have been obliged to increase wages in order to fill vacancies.  And there is certainly some room for wage increases across the economy.  But the emerging narrative is that this is a bad thing because it will create price increases.  Much of the thinking around this issue though, is based on experiences and on economic models that last saw the light of day half a century ago.  And with this in mind, we should take mainstream narratives with a pinch of salt.

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

Supply and Demand Deconstructed

Supply and Demand Deconstructed

Prices are caused by supply and demand, right? So say neoclassical economists. If you’ve bought their fairy tale, I recommend you watch the video below. In it, Jonathan Nitzan demolishes the neoclassical theory of prices. It’s a master lesson in how to deconstruct a theory.

Here’s the 100-word summary. Nitzan shows that the neoclassical theory of prices fails in six ways:

  1. Neoclassical theory hinges on utility that cannot be measured
  2. It relies on demand and supply curves that cannot be observed
  3. It depends on equilibrium whose existence it cannot confirm
  4. It requires but cannot show that demand and supply are mutually independent
  5. It requires but cannot demonstrate that the market demand curve slopes downward
  6. And it must but cannot measure capital and therefore cannot draw the supply curve, even on paper

So what explains prices?

If neoclassical theory is bunk, then what explains prices? Jonathan Nitzan, together with Shimshon Bichler, argues that prices are inseparable from power.

Here’s a window into Nitzan and Bichler’s thinking. Start with what economists call ‘demand’. If you’re going to buy something you must need or want it. But your want isn’t some fixed property of human nature. It’s a product of your social environment. Want can be massaged, even manufactured. That’s why we have advertising. Everyday, corporations shape our wants so that we buy what they’re selling. This means that demand isn’t some function of autonomous ‘preferences’ (as neoclassical economists would have us believe). Demand is actively shaped by corporate power.

Now let’s look at ‘supply’. It makes sense that if people want something that is scarce, they’ll bid up the price. The problem, though, is that scarcity isn’t just a fact of nature. It’s also an outcome of property rights.

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

A Word About the Current Chaos in Prices and Inflation

A Word About the Current Chaos in Prices and Inflation

Some prices collapsed, others skyrocketed, and the Consumer Price Index went haywire. Here’s what I’m seeing beyond the near term — and it’s not “deflation.”

Amid soaring prices of meat, beverages, fruit, veggies, and other food at home, and surging costs of personal goods, medical care services, and household furnishings, and amid a collapse in prices of gasoline, car rentals, public transportation, car insurance, lodging away from home, and other things – amid these diametrically opposed price movements, the Consumer Price Index went, as expected, haywire today. And we’re going to look at some of those gyrations beyond it.

First, here’s what got buffeted around:

The overall Consumer Price Index fell 0.8% in April from March, the steepest one-month drop since December 2008, when the economy was going through peak-Financial-Crisis 1. This brought the increase over the past 12 months down to 0.3%, the lowest since October 2015 during the oil bust at the time.

The “core” CPI – CPI without the volatile food components and the extremely volatile energy components – dropped 0.5% from March to April but was still up 1.4% from a year ago.

But wait…

What if we take out the most chaotic and largely temporary price movements at both ends to get to what the undying loss of the purchasing power of the dollar might be? Because that’s what consumer price inflation is.

There is a consumer price index that is not buffeted around by the month-to-month collapse of some prices and surge in other prices; The Cleveland Fed’s “Median CPI,” which is based on the data from the CPI, removes the extremes at both ends since these extremes are often temporary and distort long-term inflation trends.

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

Costs Are Spiraling Out of Control

Costs Are Spiraling Out of Control

And how do we pay for these spiraling out of control costs? By borrowing more, of course. 

If we had to choose one “big picture” reason why the vast majority of households are losing ground, it would be: the costs of essentials are spiraling out of control. I’ve often covered the dynamics of stagnating income for the bottom 90%, and real-world inflation, i.e. a decline in purchasing power. 

But neither of these dynamics fully describes the relentless upward spiral of the cost basis of our economy, that is, the cost of big-ticket essentials: housing, education and healthcare.

The costs of education are spiraling out of control, stripping households of income as an entire generation is transformed into debt-serfs by student loan debt. The soaring costs of healthcare are a core driver of higher costs in the education complex (and government in general), and to cover these higher costs, counties raise property taxes, which add additional cost burdens to households and enterprises as rents rise. 

Rising rents push the cost structure of almost every enterprise and agency higher.

Then there’s the asset inflation created by central bank ZIRP (zero interest rate policy) which has inflated a second echo-bubble in housing that has pushed home ownership out of reach of many, adding demand for rental housing that has pushed rents into the stratosphere in Left and Right Coast cities.

The increasing dominance of monopolies and cartels has eliminated competition in sector after sector. Monopolies and cartels skim immense profits even as the value, quality and quantity of their products and services decline: The U.S. Only Pretends to Have Free Markets From plane tickets to cellphone bills, monopoly power costs American consumers billions of dollars a year.

Thanks to their political influence, monopolies and cartels have legalized looting, raising prices and evading anti-trust regulations because they can pay whatever it takes in our pay-to-play political system.

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

UNLOCKED: The Curious Case of Rising Fuel Prices and Shrinking Inflation

UNLOCKED: The Curious Case of Rising Fuel Prices and Shrinking Inflation

On Friday, April 26, 2019, the market was stunned with a much stronger than expected 3.2% rate of first-quarter economic growth. Wall Street expectations were clearly off the mark, ranging from 1.3-2.3%. The media took this as a sign the economy is roaring. To wit, a headline from the Washington Post started “US Economy Feels Like the 1990s.”

Upon first seeing the GDP report, we immediately looked with suspicion at the surprisingly low GDP price deflator.  The GDP price deflator is an inflation measure used to normalize GDP so that prior periods are comparable to each other without the effects of inflation. 

The Bureau of Economic Analysis (BEA) reports nominal and real GDP. Real GDP is the closely followed number that is reported by the media and quoted by the Fed and politicians. Since the GDP price deflator is subtracted from the nominal GDP number, the larger the deflator, the smaller the difference between real and nominal GDP.  

The BEA reported that the first quarter GDP price deflator was 0.9%, well below expectations of 1.7%. Had the deflator met expectations, the real GDP number would have been about 2.4%, still high but closer to the upper range of economists’ expectations. 

Fueling the Deflator

Like Wall Street, we were expecting a deflator that was in line or possibly higher than its recent average. The average deflator over the last two years is 2.05%, and it is running slightly higher at 2.125% over the last four quarters. Our expectation for an average or above average deflator in Q1 2019 were in large part driven by oil prices which rose by 32% over the entire first quarter. Due to the price move and the contribution of crude oil effects on inflation, oil prices should have had an unusually high impact on inflation measures in the first quarter of 2019. 

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

Americans Brace For Shock Surge In Everyday Food Prices

Americans Brace For Shock Surge In Everyday Food Prices

The ‘patient’ Fed has been lamenting the “lack of inflation” for far too long. It is about to get its wish.

American food merchants are struggling to import fruits and vegetables from Mexico as wait times at port of entries along the Mexico–US border have surged because of a shift in Customs and Border Protection (CBP) personnel away from the port of entries to remote regions of the border to fight illegal crossings. As a result, shipments of food have dramatically declined in recent weeks, and the result is an imminent spike in imported food prices in the coming months that could put a sizeable dent in consumer wallets.

Fruit and vegetable importers that wholesale to grocery stores throughout the US, could inflate prices by at least 20% to 40% if the wait times continue, with avocado prices already soaring (see “Mexican Avocado Prices Explode By Most In A Decade After Trump Border Threat“).

After the avocado price surge, cucumbers, eggplants, bell peppers, squash, cherry tomatoes, watermelons, and most other fruit and vegetables imported from the tropics would be affected.

“(The) Mexican border, it’s one of the most important crossings to the United States,” said Joshua Duran, Amore Produce sales representative.

About 43% of all US fruit and vegetables originate from Mexico. In the last several decades, Mexico has become the top trading partner with the US. Much of the US-Mexico commerce involves mega-corporations that send products back and forth across the border as part of a critical segment of their supply chain that has increased since the North American Free Trade Agreement (NAFTA) took effect in 1994.

This month [April], distributor Amore Produce truck drivers hauling product from Mexico have experienced a 300% wait time at the various port of entries along the Mexico–US border, stuck in line for up to 15 hours.

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

The Source of Killer Inflation: Services

The Source of Killer Inflation: Services

The soaring cost of services is driven by a number of factors.

What will the future bring: fire (inflation) or ice (deflation)? The short answer: both, but in very different doses. Goods that are tradeable and exposed to technologically driven commodification will decline in price (deflation) while untradeableservices that are difficult to commoditize will increase in price (inflation), generating a self-reinforcing feedback loop of wage-price inflation.

Gordon Long and I discuss these trends in our latest program The Supply-Demand Services Problem (YouTube).

The big difference between goods that drop in price (TVs, etc.) and services that are exploding higher (healthcare, childcare, elderly care, higher education, local taxes and fees, etc.) is the relative size each occupies in the household budget: a new TV is a couple hundred bucks and a once-every-few-years purchase, while all the services cost thousands of dollars annually– or even tens of thousands of dollars.

A new TV or electronic gew-gaw is signal noise in the household budget while services consume the most of what’s left after paying for housing and transport.

A 10% decline in the cost of a new TV is $25, while a 10% increase in annual tuition and college fees is $2,500. Add in thousands more for childcare, elderly care, local taxes and fees and healthcare, and the deflationary impact of tradeable goods is trivial compared to the increases in untradeable services.

Not all goods are declining in sticker price. vehicles are rising sharply in price, a fact that’s erased by hedonic adjustments in official inflation (the new car is supposedly so much better than the previous model that the “price” actually declines-heh).

Then there’s the inexorable shrinkage of quantity and quality. The package that once held 16 ounces now contains 13.4 ounces, and the appliance that once lasted for years now lasts a few months as the quality of components is reduced. 

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

According to the Wall Street Journal, Inflation Is About to Increase the Prices of EVERYTHING

According to the Wall Street Journal, Inflation Is About to Increase the Prices of EVERYTHING

We’ve been pretty lucky over the last ten years in terms of inflation, which has remained at about 2%. However, if the Wall Street Journal is correct, our luck is about to run out.

The price of just about everything is set to increase in the coming months. Part of this is because manufacturers and suppliers are facing rising costs, just like the rest of us.

Airlines are paying about 40% more for jet fuel than they were a year ago. Trucking costs were up 7% annually in September, as trucking companies passed along their own higher labor costs. Private-sector wages and salaries in the September-ended quarter rose 3.1% from a year earlier, the strongest gain since 2008, the Labor Department said Wednesday.

Meanwhile, U.S. manufacturers are paying roughly 8% more for aluminum and 38% more for steel than a year ago as the industry adjusts to tariffs the Trump administration levied on imports of those metals. Also, a 10% tariff the administration imposed in September on $200 billion worth of various goods from China is weighing on businesses that buy those imports. (source)

With that being the case, it isn’t surprising that those costs will be passed on to consumers.

What is inflation?

Here are some basic facts about inflation from Investopedia.

  • Inflation is a sustained increase in the general level of prices for goods and services.
  • When inflation goes up, there is a decline in the value, or purchasing power of money.
  • Variations on inflation include disinflationdeflationhyperinflation and stagflation.
  • Theories as to the cause of inflation are up for debate. Some common theories include demand-pull inflationcost-push inflation, and monetary inflation.
  • When there is unanticipated inflation, creditors lose, people on a fixed-income lose, menu costs go up, uncertainty reduces spending and exporters aren’t as competitive.

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

The Fed’s Mandate To Pick Your Pocket – The Real Price Of Inflation

The Fed’s Mandate To Pick Your Pocket – The Real Price Of Inflation

Inflation is everywhere and always a monetary phenomenon.” – Milton Friedman

This oft-cited quote from the renowned American economist Milton Friedman suggests something important about inflation. What he implies is that inflation is a function of money, but what exactly does that mean?

To better appreciate this thought, let’s use a simple example of three people stranded on a deserted island. One person has two bottles of water, and she is willing to sell one of the bottles to the highest bidder. Of the two desperate bidders, one finds a lonely one-dollar bill in his pocket and is the highest bidder. But just before the transaction is completed, the other person finds a twenty-dollar bill buried in his backpack. Suddenly, the bottle of water that was about to sell for one-dollar now sells for twenty dollars. Nothing about the bottle of water changed. What changed was the money available among the people on the island.

As we discussed in What Turkey Can Teach Us About Gold, most people think inflation is caused by rising prices, but rising prices are only a symptom of inflation. As the deserted island example illustrates, inflation is caused by too much money sloshing around the economy in relation to goods and services. What we experience is goods and services going up in price, but inflation is actually the value of our money going down.

Historical Price Levels

The chart below is a graph of price levels in the United States since 1774. In anticipation of a reader questioning the comparison of the prices and types of goods and services available in 1774 with 2018, the data behind this chart compares the basics of life. People ate food, needed housing, and required transportation in 1774 just as they do today. While not perfect, this chart offers a reasonable comparison of the relative cost of living from one period to the next.

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

Housing Bubble and Everything Bubble in One Simple Picture

To understand the magnitude of the housing bubbles simply compare the index of wages to the index of prices.

How Did We Get Here?

That’s easy.

Average Wages vs CPI

Note the correct CPU comparison for this chart is CPI-W not CPI-U, not that it matters much.

No matter what official CPI one uses, the chart is a joke. Why? The CPI only reflects rent, not actual housing prices.

The Fed made this mistake during the housing bubble and they made it again from 2011 to present.

More bubbles will burts and that is very deflationary. By chasing its tail, the Fed creates the very conditions it seeks to prevent.

Price Deflation Not a Problem

For years, the Fed desperately sought more inflation. However, a BIS Study on the Historical Costs of Deflation shows routine price deflation is not a problem.

According to the BIS, “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.”

Meanwhile, people keep faith in the Phillips’ Curve. It’s pathetic.

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