When we look at things that we actually buy, we get a different look at inflation…
Measured inflation (the blue line) is quite low despite rampant money creation. But is inflation being realistically measured?
Perhaps the price of a McDonald’s Big Mac (the red line) would be a good price indicator. A Big Mac incorporates wages, several commodities, rent, utilities, and transportation costs. It costs have risen much faster than the official inflation rate.
Likewise, the PNC Christmas Price Index, (the green line) which costs out the items in the “12 Days of Christmas,” encompasses several different types of labor and commodity costs. Again, those costs have increased considerably faster than the CPI (and interestingly, almost in line with the Big Mac Index). If inflation is under-measured, then the “true” costs of living are being low-balled and our well -being is overstated. Speaking of Precision: Which any one on a fixed income can tell you is happening. This is what we see when we go to purchase an item at the store for the same price, but get less product.
Are your costs for essential consumables and supplies up just 1.5% over the past year?
“The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.5 percent before seasonal adjustment.”- BLS News Release
The CPI-U is a measure of ‘Inflation,’ used by Washington D.C. Officials as a basis for policy and legislation decisions.
The Cadbury Egg, on the other hand, has decreased by almost a third, while the price remains the same. The Cadbury Egg is an indicator of “Stealth Inflation,” which is what consumers REALLY face in their day to day purchasing behavior.
While these facts are relevant to us as consumers, the same forces are at work in our small businesses, as we continue to see price increases or declines in product provided for the price for our shop supplies and miscellaneous purchases.
While the price increases for the raw materials that we need in our precision machining shops continue to climb (March ISM Data), the policy makers tell us it is not inflationary.
Here’s the graph and an explanation from Mark J Perry, economist at the University of Michigan that tells them to tell us not to panic. Unfortunately, it doesn’t tell us how to deal with the squeeze between our large OEM suppliers ‘This is the price- pay it !” and our large OEM customers-“We aren’t accepting any price increase. We’re not paying.”
I have found Mark Perry to be a pretty clear thinker, so here is his post: RISING COMMODITY PRICES DO NOT NECESSARILY LEAD TO HIGHER CORE CPI INFLATION
by Mark J. Perry
We hear a lot of talk about how rising prices for copper, cotton, oil, and other commodities are signaling that inflationary pressures are building up in the general U.S. economy, implying a direct and tight connection between commodity prices and consumer prices. For example, Atlanta Fed President Dennis Lockhart said recently that rising commodity prices are creating “inflation anxiety.” But what exactly are the implications of rising commodity prices for core inflation, and how closely are those two variables related?
That’s the question posed in a new Chicago Federal Reserve Bank research paper by Charles Evans and Jonas Fisher. As the chart above of annual PPI inflation rates for industrial commodities and the annual core CPI inflation rates shows, the answer to the question is “not very much.” From the introduction of the paper:
“The recent run-ups in oil and other commodity prices and their implications for inflation and monetary policy have grabbed the attention of many commentators in the media. Clearly, higher prices of food and energy end up in the broadest measures of consumer price inflation, such as the Consumer Price Index. Since the mid-1980s, however, sharp increases and decreases in commodity prices have had little, if any, impact on core inflation, the measure that excludes food and energy prices.
Some economists argue that rising commodity prices are inflationary and, therefore, require a tightening of monetary policy. Others say rising commodity prices have sometimes led to inflation and sometimes not. Therefore, a monetary policy response may not be required. In this Chicago Fed Letter, we empirically assess these views by conducting a statistical analysis of quarterly data on commodity prices, inflation, and monetary policy since 1959. We find that since the mid-1980s, after the big oil shocks and the tenure of Paul Volcker as chairman of the Federal Open Market Committee (FOMC), the reactions of both core inflation and the federal funds rate (the monetary policy instrument) to shocks in oil and other commodity prices have been extremely modest.” SOP: We’ll come back another time to discuss whether or not Core CPI is an honest measure of inflation or another one of those indicators hijacked by the functionaries inside the city. In the meantime,the cost of the commodities we buy, and their surcharges and transportation, continue to rise.
You can follow Mark J Perry on his Carpe Diem Blog
Lets add one more federal burden to beleagured manufacturers. At least, thats what iGPS, a manufacturer of plastic pallets is calling for. They want to see federal standards to prevent fires from wooden pallets. They claim over 15 wooden pallet fires last year.
According to http://www.greatdreams.com/wildfires-2009.htm there were 32 000 widfire in the first 5 months of 2009. No call for congressional action that I can recall.
In my freshman economics class, my professor called this sort of thing “rent seeking.” Here’s the Wikipedia version: Rent seeking generally implies the extraction of uncompensated value from others without making any contribution to productivity, such as by gaining control of land other pre-existing natural resources, or by imposing burdensome regulations or other government decisions that may affect consumers or businesses.
We had lots of clever analysis and cool pictures here, but we’re taking them out to bring you this update: This just in : Material Handling Management Magazine reports “the National Association of State Fire Marshals (NASFM) has officially abandoned all efforts to develop code enforcement guidance regarding fire safety and pallet composition.”
It sent a letter to Bob Moore, CEO of plastic pallet supplier iGPS, confirming that the organization has permanently dropped all efforts to pursue the “controversial project.”
It also says, “NASFM does not recommend the use of wooden pallets over plastic pallets, nor does the association recommend the use of plastic pallets over wooden pallets,”
Shuman wrote. “Any suggestion to the contrary in the draft documents (including a statement that consumers using plastic pallets should switch back to a wood pallet) does not represent NASFM’s position.”
Most interesting is the word used in the link for the letter as posted on MMH’s website. it captions the letter as “settlement.”
Careful reading of the letter gives us a story of mystery, intrigue, and possibly leaked or misused documents, litigation? Who’d have thought the pallet business was so exciting?
The current service center destocking will mean shortages and delays when manufacturing recovers. This makes raw material price increases inevitable.MSCI Report Steel: US and Canadian first-half steel shipments totaled 14.8 million tons, down 43.9% year-over-year. US steel inventories at the end of the month were reported to be 5.98 million tons; down 44.4% from last year. Canadian steel inventories at the end of June totaled about 1.05 million tons, 33% below last year. Aluminum: First-half shipments of 524,600 tons of aluminum were down 43.2% year-over-year for US Service Centers. US inventories at the end of June totaled 269,800 tons, a reduction of 44.1% from a year ago.
According to The Metal Service Center Institute-In Canada, first-half aluminum shipments totaled 65,100 tons, a decline of 26.4%. Month-end inventories totaled 31,700 tons, a decline of 15.7% from a year ago. Sensemaking:Beware the “at current shipping rates, months of shipments fallacy” in the MSCI press release. This is simple arithmetic, not critical thinking. When demand recovers, “today’s current shipping rates ” are not going to be relevant at all.
The fact is these inventories are lowest since the early 1980’s, and when business resumes just a little bit, there will be nothing in the cupboard. And weeks and weeks of lead time to refill the pipeline.
The current service center destocking will mean shortages. Shortages will mean delays and raw material price increases. Delays and raw material price increases will mean higher prices for precision machined parts for finished products. You can bet dollars to donuts that the spotlight will be on you and your shop as you try to recover these increases- You’ll be called “Greedy business men fueling inflation! ”
So much for sensemaking.
Have a nice day!