Pricing Pressure

Last week I wrote about the pricing pressures in the food business because of rising commodity prices (here and here). An article in the Wall Street Journal highlights some of the pricing pressures the apparel industry is facing. From the Wall Street Journal:

Going forward, apparel companies are in a particularly tough spot, caught between uncertainty about the consumer and a sharp increase in raw material costs.
Benchmark cotton prices have more than doubled over the past year, leading retailers to raise prices on spring-season merchandise starting to hit stores now—even though they're not sure if shoppers will stomach the increases. 
...Teen retailer Aeropostale Inc. is also keeping inventories lean. "Spring is tight," CEO Tom Johnson said this week. Aeropostale lost market share during the holiday because of steep discounting at higher-priced brands such as Abercrombie & Fitch Co. The company expects to raise its prices between 3% and 5% for spring, Mr. Johnson said. 
Phillips-Van Heusen Corp., which includes Tommy Hilfiger and Izod, said this week its prices could increase by as much as 15% in the second half of the year. Warnaco Group Inc., maker of Calvin Klein jeans and underwear, also expects some price increases.

If commodity prices continue to rise in tandem with stock prices it will eventually cause problems. We are already seeing food riots in parts of the World. What would happen to our debt driven economy if inflation led to higher interest rates?

18 comments:

PJ said...

That's what makes the Fed's pro-inflation policy so hard to understand.

I know the literature it's based on and it relies heavily on a single data point - FDR's devaluation of the dollar in terms of gold.

But that occurred after a tremendous 4-year liquidation of debt. We still have our debt liquidation to go through. Doing it in a period of high interest rates may be more disruptive than the Fed realizes.

Anonymous said...

There is no, repeat no, food shortage on the planet today. Sort of… Using the United Nations suggested daily calorie intake there is more than sufficient foodstuffs produced annually, globally. Period. Now then, the question is how you use them....for example, if you wanted to bring the daily calorie level in both China and India up to the U.N. level it would take an additional, not total but additional, 31 million tons of foodstuffs. To put that in perspective the U. S. ethanol fraud consumed 165 million tons of corn during 2010. China has 2.3 trillion dollars in Treasuries but chooses not to expend it on foodstuffs for its own population. India was a net exporter of wheat in 2010.....I had the opportunity to have dinner with the Chairman of one of the largest commodity/food processors in the world over the holidays....there is no food shortage...and the American ethanol scam has absolutely destroyed relationships with food importers from the U.S. , like Egypt for example, that took decades to develop....and now for some Physics: if ethanol were in fact a "sum positive" they would use ethanol as the energy source to produce (boil/distill) more ethanol/corn mash.....and they, the ethanol producers, don't......because it consumes more energy to make a gallon than you get out of it (referred to as the “thermal load factor”)....It’s nothing like an oil refinery that uses part of the barrel of crude oil to power the refinery.
Just think- 40% of the American corn crop now goes for the 10% gasoline EPA mandated blend rate yet the EPA is pushing to raise the blend rate to 15%--or 60% of Americas corn crop. As an aside 80% of the canola crop, a premium cooking oil, is used for bio-fuels in Germany. Double the price of corn and bull doze another million acres of Amazon jungle to plant; triple the price of tortillas and watch the Mexicans pour north across the border. Noted: Chuck Grasley, the erstwhile Republican Senator, is the mouthpiece for the ethanol scam. He farms 4,120 acres of Iowa corn ground. My source tells me that without the ethanol scam (and it was renewed for only 1 year…) the price of wheat goes to 4$ and corn to $3.35.
.
As to the price of cotton...the Bangladeshi shirt makers are switching to more polyester and less cotton. The base material in polyester is xylene. Xylene is also the base material in Pepsi and Coke bottles and they, the beverage makers, are very unhappy with the situation....as the are with the price of corn syrup...a surge of which has been caused by the ethanol fraud...and around and around and around we go.

Tsachy Mishal said...

I am not arguing as to why all this is happening. Only that it is happening and if it continues it will be a problem.

Maybe once deflation hits, commodity prices will go back down as many readers contend. Maybe once we stop wasting corn food prices will go back down. You all may be correct. But right now I am seeing signs of rising prices.

revelo said...

http://www.bloomberg.com/news/2011-01-16/french-bakers-set-to-raise-baguette-prices-as-wheat-futures-almost-double.html

Note that DOUBLING of wheat prices causes the price of the baguette (which weighs about 200 grams or slightly less than half a pound) from 90 cents to 95 cents. Even in something as basic as bread, cost of the underlying commodity is a minor factor in the retail price.

If we were talking about a restaurant meal, where the standard bread basket contains half a baguette of bread, we are talking about a 2 cent hike due to commodities versus a meal cost of 10 euros. Absolutely trivial.

Tsachy Mishal said...

revelo,
A 5% price jump in one shot is not inflation? I thought we were fighting deflation here? Isn't that why we have QE2?

revelo said...

(BTW I got a few of my numbers wrong from that bloomberg article, but the 5% number is basically correct.)

The point is that this is 5% of a very small component of the average person's expenditures. The average Frenchman eats less than one baguette/day. So they are paying 5 cents more/day? Per capita expenditures in France are at least $20K. .05/20000 = next to nothing.

The big inflation story is healthcare, both in the US and the rest of the developed world. The big deflation story is real-estate, durables, anything which is can be outsourced or is otherwise affected by the internet. Commodities other than oil is a rounding error.

revelo said...

Sorry, more arithmetic errors.

5 cents extra for baguette / 55 euros = .09% increase in daily expenditures = next to nothing.

Tsachy Mishal said...

revelo,

That math trick might work on a 3rd grader. But what about when you add the increase in energy prices, the increase in other food prices, the increase in clothing prices, the increase in rental prices (here in the US according to REIS, a private organization that keeps the statistics) etc..

Tsachy Mishal said...

I have contacts that import goods from China. They are all seeing price increases from their Chinese manufacturers, not just because of rising commodity prices. Chinese labor prices are rising as well.

PJ said...

The Fed wants inflation. The big question is what are they targeting? Bernanke says 2% inflation because that is politically acceptable, but there's a big move among the economists to target 5% nominal GDP growth instead, which means that when we go back into recession their inflation target becomes ~7%.

With 7% inflation will people be fund trillion dollar deficits at 4%, when they can buy gold or commodities instead?

With a 2% inflation target we'll be oscillating between -1% and 5% inflation, given Fed lags and errors, which is bad enough. With a 5% NGDP target we could have spikes up to double-digit inflation.

This could be very disruptive to businesses. 1979, deja vu.

Tsachy Mishal said...

Please note I am not saying that inflation is a problem right now, rather that if commodities continue to rise it can become one.

I have never lived as an adult through a period of high inflation but my readings of history have told me that once it gains a head of steam it is very difficult to put the genie back in the bottle.

Anonymous said...

you guys all don't understand we are in deflation.

Anonymous said...

any form of inflation is a financial derivative.

james herman said...

There is no, repeat no, food shortage on the planet today. Sort of… Using the United Nations suggested daily calorie intake there is more than sufficient foodstuffs produced annually, globally. Period. Now then, the question is how you use them....for example, if you wanted to bring the daily calorie level in both China and India up to the U.N. level it would take an additional, not total but additional, 31 million tons of foodstuffs. To put that in perspective the U. S. ethanol fraud consumed 165 million tons of corn during 2010. China has 2.3 trillion dollars in Treasuries but chooses not to expend it on foodstuffs for its own population. India was a net exporter of wheat in 2010.....I had the opportunity to have dinner with the Chairman of one of the largest commodity/food processors in the world over the holidays....there is no food shortage...and the American ethanol scam has absolutely destroyed relationships with food importers from the U.S. , like Egypt for example, that took decades to develop....and now for some Physics: if ethanol were in fact a "sum positive" they would use ethanol as the energy source to produce (boil/distill) more ethanol/corn mash.....and they, the ethanol producers, don't......because it consumes more energy to make a gallon than you get out of it (referred to as the “thermal load factor”)....It’s nothing like an oil refinery that uses part of the barrel of crude oil to power the refinery.
Just think- 40% of the American corn crop now goes for the 10% gasoline EPA mandated blend rate yet the EPA is pushing to raise the blend rate to 15%--or 60% of Americas corn crop. As an aside 80% of the canola crop, a premium cooking oil, is used for bio-fuels in Germany. Double the price of corn and bull doze another million acres of Amazon jungle to plant; triple the price of tortillas and watch the Mexicans pour north across the border. Noted: Chuck Grasley, the erstwhile Republican Senator, is the mouthpiece for the ethanol scam. He farms 4,120 acres of Iowa corn ground. My source tells me that without the ethanol scam (and it was renewed for only 1 year…) the price of wheat goes to 4$ and corn to $3.35.
.

revelo said...

There is one thing and one thing only that will cause inflation right now (other than absurdities like the government giving everyone a million dollar), and that is a major war (or a natural disaster with economic impact equivalent to a major war).

Rising commodity or Chinese import prices simply means people have to consume less. Just because the price of oil or wheat or Chinese imports goes up, doesn't mean workers get a pay raise. And without a pay raise, they have to cut back on other expenditures to pay the higher prices for oil, wheat or Chinese imports. The final effect is zero. Cost-push inflation is a one-time bump, it is different from a wage-price spiral.

If somehow inflation rises to 7%, as PJ suggests, interest rates will rise correspondingly. There goes the housing market. Furthermore, regardless of what the Fed wants, it can't create demand. All it can do is prop up asset prices. If the asset owners don't spend, there is no demand, and thus no inflationary pressure. I don't see evidence of increased willingness of consumers to spend. The long-term trend is towards less spending, since the baby-boomers are woefully behind in preparing for retirement and need to save more. Nor does Congress seem willing to increase spending, and the state and local governments are under heavy pressure to reduce spending.

All it will take is a year without all these weather problems to produce a bumper crop of wheat and corn to send prices plummeting. Ditto for metals. At some point, new capacity will come online and we'll see a return to the usual situation of gluts rather than shortages.

Anonymous said...

we're in deflation. ur grandkids will agree.

Chaos! said...

Shanghai down 3% last night, then Jobs takes a leave of absence, could be a wild day tomorow. Lace 'em up tight!

Congratulations on the management business.

Tsachy Mishal said...

thanks chaos!