Funny You Should Mention That

A reader in the comment section mentioned his/her trip to Costco as proof there is no inflation. Thats funny because the CEO of Costco believes otherwise. From the most recent Costco earnings call courtesy of Seeking Alpha:
Again, we are seeing some inflationary pressures impacting fresh food prices. Our buyers in that area estimating that in Q1 that represented perhaps up to 3% of inflationary pressures.
Anecdotally, steak prices up year-over-year over 15% per pound. The entire, what they call the beef complex which is everything, both imported, exported and all parts of beef was up about 4% on average. So steaks, which is what our strength is, has had the most inflationary pressure. Poultry not up yet a lot but coming. Overall beef, chicken, pork, the estimates are that you'd expect over the next six months to see perhaps inflation in the 5 to 10% range.
On the bakery side, soybeans and soy oil were up 50 to 60% year-over-year. Sugar up 20%. Butter up 5% and wheat up 30% year-over-year. So the raw materials in Bakery are good and Bakery we've been trying to hold the prices as long as we can so we've actually incurred lower margins in Q1 in the Bakery. Notwithstanding that the strength in margins in meat and produce more than offset that so overall fresh foods margins in Q1 that were up year-over-year.

15 comments:

Anonymous said...

Avg yearly inflation rate is 3.26%. In 2009, inflation rate was negative, clocking in at -0.34% = deflation. Yes, we are approaching back to normal inflation. I don't see what your point is.

Anonymous said...

We are still below historical avg.

Tsachy Mishal said...

My point is that inflation is back to average and rising while interest rates are at unprecedented levels and we are printing money to boot. That means there likely should be a normalization of interest rates and an end to QE. QE was to stop deflation. By your own admission we are at normal inflation levels.

Tsachy Mishal said...

I understand if your stand is that commodities will collapse and we will fall back into deflation. But that is not what is happening right now.

I constantly question myself day in and day out. But there bulls, bears, inflationists and deflationists out there that just ignore any evidence that does not agree with their conclusions.

Anonymous said...

We are gradually moving towards a sustained positive inflation rate but we are not at historical avg.

Anonymous said...

From your previous posts, my take on your inflation stance is that it's a growing problem. My thesis is that it isn't when the fed's intent is to bring inflation back to normalized levels.

PJ said...

Bernanke's speech - the one that got me out of bonds - said the goal of QE was positive inflation (2%).

If 2% is what they're saying publicly, you can't rule out that privately they believe 4% is optimal.

The trouble is that 2-4% inflation may be tolerable when debt levels are low but can create extreme uncertainty and credit risk when debt levels are high.

The Fed has been extremely procyclical for some time now. They have unrealistic ideas about what levels of economic growth are feasible and what their policies can achieve. So reaching for what they think is feasible, they give us bubbles and crashes.

In this case, I think the biggest inflationary impulse came from abroad - esp. China. I think the Fed has also underestimated how much foreign countries influence the US economy.

We have sorcerers' apprentices playing with the financial markets. At some point we're going to have huge volatility because of it.

revelo said...

>just ignore any evidence that does not agree with their conclusions.

And that's how things have been since the late 1990's. There is a boatload of dumb money out there in institutions and IRA's/401ks that is constantly chasing trends. The smart money follows along, then hops off before the bend at the end, leaving the dumb money holding the bag. The underlying problem is excess liquidity, financialization, surplus of savings with shortage of viable investment opportunities.

There is plenty of evidence of commodity inflation right this instant, but little evidence that the Chinese or other emerging economies have developed enough endogenous consumer demand to sustain that inflation. This implies the commodities are mostly being used to build more excess capacity. When that capacity comes online, we'll get another round of imported deflation. Note that some of that capacity is in services. Think medical tourism, outsourcing of desk jobs (computer programming, financial analysis, grunt-level legal work, radiology interpretation, etc).

As PJ notes, it is the Chinese (and other exporters) who really control the situation, not the Fed. I'll believe inflation is a problem when the Chinese, Japanese, Koreans, Germans, etc give their workers a massive tax cut and/or pay hike so they can spend more on consumption. Until then, I see yet another investment bubble that will send commodity prices into freefall when it bursts.

I put my money where my mouth is. I'm still in intermediate-term corporates. Yes, I was stupid not to sell back in October, but if I had sold then, I would have rebought by now. The stock market and gold can go up and up for a very long time and to very high levels regardless of fundamentals. Look at 1999 and 2007. I'm not smart enough to get off before the bend at the end, which is why I don't play these bubbles.

Tsachy Mishal said...

Your point is valid, which is that we will see deflation once commodity prices drop.

I would point out that Chinese workers have been receiving pay increases. The news is loaded with them. i believe there were stories of tech companies giving them 40% raises.

I also have contacts who import from China. Their manufacturers are raising prices because of commodities and because labor is getting hard to find. Workers sleep in bunk beds by the factory and they are just getting up and leaving.

revelo said...

The problem is that the workers aren't spending these wage hikes. Rather they are saving them, trying to build up a rainy day fund for layoffs, illnesses, old age. Even if the Chinese government were to institute a safety net tomorrow, it would still takes decades for the people to develop enough of a sense of security in the future that they would be willing to spend freely. This bloomberg video show what happens when people lack the willingless to spend freely:

http://www.ritholtz.com/blog/2011/01/dongguan-ghost-mall-haunts-chinas-property-boom/

That leaves the Chinese government as the only potential source of demand. Right now, that demand is investment demand--they are building more and more factories, building, shopping centers, roads, etc. Once the building is finished, demand stops a boatload of capacity is dumped on the market.

What would change my opinion about the outcome is if the Chinese government started spending on consumption rather than investment, but that is not the way government bureaucrats think, especially not in asia. Bureaucrats think of consumption as waste (other than war, which is a necessity) and thus always prefer investment spending.

Anonymous said...

i suspect that commodity demand, excluding gold, isn't driven by investments. it's driven by stockpiling. and the stockpiling is driven by lack of faith in the dollar in the long term. while china may not generate enough domestic demand to justify further infrastructure investments, the stockpiling will continue. on another note, we will not see inflation excl oil/commodities. there are hundreds of millions of people ready to work for nothing. there will be no wage/price spiral. commodities will collapse only when the economy improves and liquidity is pulled back.

revelo said...

One more thought. At some point, these inscrutable orientals will figure out that building ghost malls, ghost towns, excess factory capacity, etc, etc is a lot less profitable than building soybean and cooking oil farms in Africa, copper and other mines in Africa and central Asia, nuclear power plants in China itself, solar power installations in the Sahara--and so instead of a glut of infrastructure, they'll generate a glut of commodities.

revelo said...

Actually, I agree with anonymous about the stockpiling. The same bureaucratic mentality that prefers investment to consumption, see stockpiling as a worthwhile expenditure, and once the bureacracy is developed to buy the stockpiles, build the warehouses, maintain the warehouses, etc, you have a political constituency for further stockpiling. So yes, the stockpiling could go on a long time. Which just means the eventual collapse will be that much worse. Imagine 10 years of copper supply or whatever suddenly dumped on the market when the government decides to disband the stockpiling bureaucracy...

Anonymous said...

wonder if any of you have ever even visited china. most of the footage of "ghost" malls and cities are shots taken prior to migrating millions of rural citizens into the city in one shot. the chinese government is set on moving 30% of it's rural population into cities by the year 2030. That's 600 million people.

Anonymous said...

the chinese have no need to build new farms in africa. the vast majority of it's population are agrarian.