SPOTLIGHT: INFLATION SPREADING

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INFLATION WALLOPS EUROZONE

Costs for Europe’s manufacturers and service companies rose at their fastest pace on record, according to IHS Markit’s October purchasing managers index.

The index fell from 56.2 in September to 54.3 in October, a sharper drop than analysts had foreseen and taking the measure to a six-month low.

Numbers above 50 indicate expansion; the higher the number, the more robust business activity is.

Even though the index remained positive, factory output plunged to a 16-month low.

Increasingly, businesses passed their higher costs through to consumers, accelerating price increases to their fastest in almost 20 years, IHS said.

The soaring expenses are the result of clogged ports, back orders, and shortages across a range of goods, IHS noted.

Suppliers’ delivery times are their second-slowest in 20 years, exceeded only by delays seen last May.

Supply problems are dragging down Europe’s overall post-shutdown economic recovery, the Financial Times noted.

“A sharp slowdown in October means the Eurozone starts the fourth quarter with the weakest growth momentum since April,” IHS’s chief business economist Chris Williamson said to the FT.

“Supply chain delays remain a major concern, constraining production and driving prices ever higher,” he said.

Although IHS’s index remained positive, factory output fell to a 16-month low from the month before, with shortages “near stalling” German manufacturing. .

The bank’s governing body meets this week and may revise its view.

“The combination of slowing growth momentum and building inflationary pressure could exacerbate divisions within the ECB’s governing council,” Hussain Mehdi, strategist at HSBC Global Asset Management, told the FT.

IHS’s data is “a warning sign” for the Eurozone’s economy, economist Ralph Soveen at Commerzbank, said in a comment quoted by the FT.

TREND FORECAST: The European Central Bank (ECB) has continued to insist that inflation will be moderate and transitory (“ECB Head Downplays Inflation,” 25 May 2021). And, they say they will not raise interest rates or stop their quantitative easing schemes... we disagree. 

Interest rates will rise, and with so many COVID War restrictions on their population, Europe will suffer Dragflation: the economy will decline and inflation will rise... and so too will anti-establishment political movements. 

POWELL, YELLIN AGREE: HIGHER INFLATION AHEAD

With U.S. inflation accelerating to 5.4 percent last month, U.S. Federal Reserve chair Jerome Powell admits that prices will continue to rise at a brisk pace for longer than he and his Fed colleagues have been predicting.

“Supply-side constraints have gotten worse,” Powell said on 22 October in remarks to a conference. 

That has driven inflation far beyond the Fed’s goal of a 2-percent annual rate and “we know how painful that is” for consumers, he told the gathering.

“The risks are clearly now to longer and more persistent bottlenecks and thus to higher inflation,” he said, vowing that the central bank will “make sure that our policy is positioned for a range of possible outcomes,” apparently meaning that the Fed is ready for inflation to continue indefinitely.

Still, Powell seemed to hew to his belief that inflation is “transitory,” saying “no one should doubt that we will use our tools to guide inflation back down to 2 percent” if Fed policy makers see inflation becoming embedded in the economy, he pledged.

Fed officials have signaled that they will begin to wind down their $120-billion monthly bond purchases as early as November, sooner than many economists had expected just weeks ago.

“I do think it’s time to taper [bond purchases],” Powell told the conference. “I don’t think it’s time to raise [interest] rates.”

The Fed will not raise interest rates while continuing to juice the economy by buying bonds, bank officials have said, a combination that would be likely to worsen inflation.

However, the probability of at least two interest-rate hikes by the end of next year has risen to 75 percent, according to futures market prices monitored by CME Group.

Before the Fed’s September meeting, the market was pegging the odds at only 20 percent.

In a 24 October CNN interview, Treasury secretary Janet Yellin predicted inflation would remain high through the middle of next year.

However, she continued to describe high inflation as “temporary” and denied that the Fed has lost control of it.

“Americans haven’t seen inflation like we have experienced recently in a long time,” she said, “but as we get back to normal, expect that to end.”

More people accepting vaccines, $2.8 trillion in stimulus money dumped into the economy since December, hoards of cash saved during 2020’s COVID War, rock-bottom interest rates, and the Fed’s $120-billion monthly gift to the economy have fired an economic recovery the strength of which has surprised almost everyone.

The core inflation rate, which excludes food and energy and is a key Fed tool in gauging inflation, was running at 3.6 percent in August.

TRENDPOST: First, inflation was “temporary;” then it became “transitory,” a more effective weasel word that implies an even more vaguely defined period of time.

Now Powell knows what everyone else, especially Trends Journal readers, have known for more than a year: inflation is a serious, long-term threat to the U.S. and global economies. 

In an August speech, Powell listed five factors convincing him that high inflation was “temporary.” One of them: the absence of “broad-based” inflation.

At the time he spoke, inflation already had widely permeated commodities and consumer goods (“Commodities Supercycle Underway?” and “Inflation Ripples Through U.S. Economy,” both from our 11 May, 2021, issue).

Powell was either deluding himself, deliberately misspeaking—perhaps to keep markets and shoppers calm—or he and the Fed staff are abysmally incompetent at reading numbers available in news reports.

TREND FORECAST: We were among the first to forecast untamed inflation as a key factor facing the world after 2020’s economic shutdown (“Consumer Prices Rise in July,” 18 Aug 2021).

All signs indicate that rampant inflation will continue, for several reasons.

First, the Fed is unprepared to raise interest rates until it closes down its monthly bond purchases, a process the central bank has said will take several months.

Higher interest rates are a nation’s key weapon against inflation.

Second, supply-chain kinks and gaps—including the absence of about 80,000 truck drivers in the U.S. alone—will persist well into next spring and quite possibly longer.

Third, Americans manufacture less and less and import more and more, exposing the country more broadly to global financial pressures.

Fourth, consumers are buying everything they can grab. 

In September, retail sales rose 15.6 percent compared to a year earlier, rising 0.7 percent from August; analysts had expected a slip of 0.2 percent.

Unchecked consumption in a shortage economy guarantees inflation.

U.S. HOME SALES, PRICES ROSE AGAIN IN SEPTEMBER

In September, U.S. home sales grew 7 percent from August, the biggest one-month jump since January, according to a 21 October report from the National Association of Realtors (NAR).

In a months-long run of surging demand, September stood out from the rest, the NAR said.

“This autumn looks to be one of the best autumn home-sales seasons in 15 years,” Lawrence Yun, the NAR’s chief economist, told The Wall Street Journal.

However, the soaring prices that strong demand has created continues to block first-time buyers (“Median U.S. Home Price Sets Another Record,” 29 Jun 2021), with their share of September’s sales dropping to 28 percent, the lowest monthly proportion since July 2015, the WSJ reported.

At the same time, all-cash buyers are taking more of the sales, the NAR noted, grabbing 23 percent of those in September, compared to 18 percent a year earlier.

However, some signs point to a slowing market.

The median sale price last month was $352,800, a 13.3-percent gain year on year but less of a rise than August’s 15.2 percent.

Also, 15 percent of listings showed price reductions, almost twice as many as the 7.9 percent in April, the NAR said.

TREND FORECAST: We have pointed out repeatedly in articles such as “Residential Rental Rates Skyrocketing” (10 Aug 2021 ) and “Rents for Single-Family Homes Reach 15-Year High” (1 Jun 2021) that as high home prices lock out young families and moderate income earners, residential rents also are climbing out of reach for those groups.

As rents move higher, those homeowner hopefuls will find it harder to save enough cash for a down payment, consigning them to be lifelong renters (unless they inherit property or cash to buy one) unable to build net worth through home ownership, the primary way American families have accumulated wealth, a fate we detailed in “Rents Soaring: What’s Next?” (21 Sep 2021). 

MORE INFLATION AND SUPPLY CHAIN CLOGS AHEAD

It’s old news, but now Prepare for continued rising inflation and persistent supply line bottlenecks, private equity giant Blackstone has told the approximately 100 companies in which it owns an interest, according to the Financial Times.

“We are talking to our companies about having their supply chains closer to home and keeping more inventory [of raw materials] on-site,” Jonathan Gray, Blackstone president, told the FT.

“Our expectation is that we will see higher levels of inflation,” he said. “This is going to stick with us.”

Nestlé, Procter & Gamble, Unilever, and other makers of consumer and industrial goods have already raised prices or announced impending hikes, as we reported in “Prices for Consumer Goods Set to Rise” (4 May 2021) and “Food Companies Raise Retail Prices” (15 Jun 2021).

Blackstone posted third-quarter earnings of $1.4 billion, nearly doubling the $794.7 million it made in the same quarter last year.

The firm held $730.7 billion under management as of 30 September.

TREND FORECAST: Most observers, including those who manage supply chains, say that kinks and clogs will remain in the systems through next spring and possibly until mid-year.

We agree. Look for inflation to stay well above the Fed’s 2-percent target rate for at least another year.

PORTS’ TRAFFIC JAMS KEEP RISING

On 19 October, more than 100 ships had queued up outside the ports of Long Beach and Los Angeles, a new record and the latest development in a supply chain clog that experts expect to last well into next year.

Together, the ships hold about 200,000 shipping containers waiting to be unloaded and reloaded, according to Port of Los Angeles figures.

The ports will prioritize handling consumer items for the winter holiday shopping season and also auto parts to boost vehicle production in U.S. factories, port director Gene Seroka told CNN Business.

The number of ships waiting is growing larger faster; however, the backlog at Los Angeles should be cleared in February, Seroka said.

The two ports handle 40 percent of U.S. imports and 30 percent of exports; the backed-up line of ships is causing shortages of commodities and consumer goods both in the U.S. and around the world, in part because shipping containers stacked on boats are not available for other shipments.

In the 12 months ending 30 June, the Los Angeles port handled 10 million shipping containers, a record for ports in the western hemisphere, The New York Times reported.

Even that record pace has not been adequate to ease the backlog.

The port of Los Angeles will now operate 24 hours, seven days a week, under orders from president Joe Biden, who also said he is considering calling up the National Guard to relieve the shortage of truck drivers.

Biden should consider enlisting military troops to drive trucks and fill other roles in easing the supply chain nightmare, retired U.S. Army Lt. General Russell Honoré, who coordinated the government’s response to 2005’s Hurricane Katrina, said earlier this month in an MSNBC interview.

FedEx, UPS, and Walmart also have pledged to expand their efforts to move goods using their truck and rail resources and the Union Pacific railroad has expanded to 24-hour, seven-day work at its San Pedro depot attached to the California ports.

The jams at ports and all along the global supply chain are the key cause of current high inflation, according to a number of comments made by Jerome Powell, chair of the U.S. Federal Reserve, and other Fed officials. 

In addition to fanning inflation and causing shortages of everything from toys to truck parts, the ports’ backlog is an environmental disaster: ships at anchor still run diesel engines for power, filling the skies with smog that drifts across nearby communities, most of which are home to low-income families, the NYT noted.

Those communities “are taking the brunt of the pollution burden while all of us are benefiting from cheap flat-screen TVs from China or Korea or whatever is in those containers,” attorney David Pettit with the Natural Resources Defense Council said to the NYT.

TRENDPOST: In mid-May, only 20 ships were waiting for dock space in the two ports (“Shipping Delays Help to Inflate Prices,” 25 May 2021), a number that more than doubled to 44 in the third week of August (“Ships Clogs = Inflation,” 14 Sep 2021), and then reached 73 four weeks later (“Backlogged Ships: New ABNormal,” 28 Sep 2021).

WHEAT PRICE HIGHEST IN NINE YEARS

The price of spring wheat rose to $10.13 a bushel on 22 October, the highest since July 2012, as hot, dry weather from the U.S. plains to Russia’s grain basket shrank harvests.

Prices climbed steadily over the past six weeks on rising demand.

Spring wheat’s scarcity is sending buyers to the more-plentiful hard red winter wheat, the price of which shot to its highest since May 2014, up 3.5 percent on 22 October alone, ending at $7.74 a bushel.

Soft winter wheat, a foundation ingredient in cakes and cookies, gained 2 percent to $7.56.

The outlook for 2022 is not much better.

The official U.S. weather forecast for the next three months calls for continued drought in key wheat-growing areas; the outlook may prompt farmers and their funders to withhold investments in new crops, which could tank supplies to new lows.

The U.S. expects wheat stocks to end this year at their lowest since 2016, The Wall Street Journal said.

Food prices already are at their highest in 10 years, according to the United Nations Food and Agriculture Organization, driven by shortages and supply-line interruptions.

The shortage also is partly a result of China’s greater use of wheat to feed hogs as it looks for alternatives to corn and soy.

NICKEL PRICE SOARS TO SEVEN-YEAR HIGH ON SHRINKING SUPPLY

Nickel traded as high as $20,963 per ton last week, the highest since May 2014, as Canadian and Philippine supplies were projected to run short.

Vale SA, a major producer, cited a strike at its Canadian mine. Refining company MMC Norilsk Nickel reported reduced output last quarter and the Philippine government warned of a 10-percent reduction in supply this year due to frequent rains and a shortage of ships coming to its ports.

Indonesia, a key source of nickel, said in September it will ban the export of, or tax, certain nickel ores and products to keep more of the ore at home for use in the country’s growing industry manufacturing electric vehicle batteries.

The pending shortage collides with rising demand for stainless steel, which typically contains around 11 percent nickel. In addition, the aerospace and petroleum industries, also heavy users of nickel, are rebounding from the COVID-era economic collapse and ramping up production.

MAGNESIUM NEARING CRITICAL SUPPLY SHORTAGE

Magnesium, a metal essential in the aluminum alloys in vehicles, is approaching a crisis of supply that could force auto makers to shut down production within weeks, German chancellor Angela Merkel told European Union leaders on 22 October, the Financial Times reported.

About 87 percent of the world’s magnesium supply, and 95 percent of Europe’s, comes from China, which has slashed output recently amid power outages and rising fuel prices there.

Twelve European business groups representing steel and auto makers, metals companies, packaging producers, and other industries issued a statement last week warning of “an imminent risk of Europe-wide production shutdowns” if China fails to restart its smelters.

Europe’s industries only have enough magnesium on hand to last until December, the groups warned.

The problem is worsened by supply-line backlogs that could delay shipments from China well beyond then.

The growing shortage has spiked magnesium’s price fivefold so far this year, the FT reported.

The European Union is shaping a strategy to reduce its reliance on imports of key raw materials, including magnesium, the FT said. 

EUROPE’S BIGGEST PAINT MAKER WILL RAISE PRICES AGAIN

Netherlands-based Akzo Nobel, which makes Dulux and other standard paint brands sold across Europe, has warned it is likely to raise prices between 5 and 6 percent this year after hiking them 9 percent earlier in 2021.

The company is facing further increases of as much as 20 percent in raw materials’ costs and will pass most, if not all, of those costs to consumers, the Financial Times reported.

Spiking commodity prices and troubles in supply and distribution chains are forcing the increases, the company said.

Inflation will continue to push prices up through at least mid-2022, the company predicted, edging retail prices up by low to mid-single digits, it expects.

“It’s probably easier to say where we don’t feel [cost] pressure,” CEO Thierry Vanlancker said in comments quoted by the FT. “It’s very much across the board.”

Specifically, the petrochemical industry in Louisiana and Texas has been unable to make usual deliveries after last spring’s deep freeze and Hurricane Ida’s damage in August, he noted.

However, consumer demand for the company’s products is so strong that buyers are unlikely to reduce purchases or decamp to cheaper brands, he said.

CHIPOTLE REPORTS HIGHER EARNINGS AFTER RAISING MENU PRICES

Chipotle Mexican Grill reported third-quarter sales of $1.95 billion, up 22 percent from the year before and setting a new quarterly record as diners flocked back to restaurants after COVID-era restrictions on movement and gathering eased.

The company’s net income for the period reached $204.4 million, more than doubling that of 2020’s third quarter.

Higher menu prices helped the company cope with staff and materials shortages and higher costs, it said. 

Price hikes had not deterred customers, which enabled the company to post stellar numbers.

More restaurants are handing their higher costs to consumers, with fast-food menu prices up 6.7 percent through the 12 months ending 30 September.

TREND FORECAST: It’s true inflation and it is not temporary. Moreover, as we note, workers will demand higher wages and unions will be growing strong... which will also push inflation higher.

And as we reported in “Worker Shortages, Virus Hobble Restaurants’ Recovery” (21 Sep 2021), restaurants would lose sales because they cannot find enough staff. 

Besides generous government payments given to the unemployed, when the COVID War had them locked down, in their “quiet” time many people reviewed their working lives and did not want to return them. And now, with “No Jab, No Job,” it will be more difficult to fill positions. 

Thus, the greater the worker shortage, the higher the pay... and the higher the prices businesses will charge for products and services which equals higher inflation.

2 Comments
  1. […] his mistaken view in a 24 October CNN interview, describing high inflation as “temporary” (“Powell, Yellin Agree: Higher Inflation Ahead,” 26 Oct […]

  2. […] his mistaken view in a 24 October CNN interview, describing high inflation as “temporary” (“Powell, Yellin Agree: Higher Inflation Ahead,” 26 Oct […]

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