SPOTLIGHT: INFLATION SPREADS

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SUPPLY CHAIN CLOG COMPLICATIONS

Snarls in global supply chains are due, in part, to different areas of the world addressing the latest round of COVID infections at different rates, The Wall Street Journal reported.

In the West, vaccination campaigns are well under way; countries and companies have emerged from shutdowns or cutbacks and need materials from Asian manufacturers, the WSJ noted.

However, Asia has been much slower to vaccinate and remains in the midst of strict lockdowns in many areas; Vietnam’s Ho Chi Minh City manufacturing hub had imposed orders that had closed most factories before relenting earlier this month (“With Vietnam Lockdown Sending Business to Other Countries, They Do An About Face,” 5 October, 2021).

The mismatch is complicated by workers unready to return to work due to family and child care responsibilities, fear of the virus, or because they have retired early, as we have noted in the U.S. MARKET section (See Women Exit).

Shortages and bottlenecks are damaging manufacturing in particular, the WSJ noted.

The global auto industry will lose about 7.7 million vehicle sales this year, about 10 percent, due to the ongoing shortage of computer chips, which will linger into 2023, Daimler CEO Ola Kallenius said in comments quoted by the Financial Times.

Factory output powered the global recovery but has stagnated recently, according to data from Germany’s Kiel Institute for the World Economy.

Kiel recently lowered its forecast for this year’s global growth from 6.7 percent to 5.9 percent.

TREND FORECAST: The tangles have sent cross-ocean shipping rates up by two to five times or more, compared to pre-COVID rates, as we have detailed in “China Closes Key Port Terminal: Trouble Ahead” (24 Aug 2021).

And, the shortfalls and tie-ups, should they continue to maintain at their current levels and/or escalate will lower holiday shopping season expectations. (See “Spotlight: Inflation Still Inflating,” 28 September, 2021.)

GROCERIES: PRICES CLIMBING AS SUPPLIES DISAPPEAR 

Global food prices rose in September for a second consecutive month, pushed by higher costs of cereals and vegetable oil, according to a 7 October report from the United Nations Food and Agriculture Organization (FAO).

The FAO’s Food Price Index, combining costs of a variety of cereals, dairy products, meats, sugar, and vegetable oils, rose 1.2 percent to 130 in September, 32 percent above the index’s rating a year previous.

Only meat prices remained level during the month, the FAO said.

Food prices have climbed 27 percent in calendar 2020 to date, according to RT, the Russian news service, in a trend we have documented in “Food Companies Raise Retail Prices” (15 Jun 2021) and elsewhere.

“This is one of the most dynamic price increases since the ‘70s,” Ivan Fedyakov, CEO of the INFOLine research service, told RT. 

“Prices are growing not only for fruits and vegetables or milk, but also for feed and fertilizers,” he noted. “This triggers a price spiral, and prices will continue to rise, but purchasing power is not unlimited.”

Especially with commodities shortages, scarce labor, and supply-line breakdowns, higher grocery prices are inevitable, an executive of U.S. grocery chain Kroger said last month in comments referenced by ZeroHedge. 

The current energy crisis afflicting Europe may have the knock-on effect of cutting food production and sending prices higher, ZeroHedge noted. (See “Will Surging Gas Prices Sink UK, EU Economies?” 21 September, 2021.)

Fertilizer production relies on natural gas, the cost of which is soaring out of sight across the continent.

Most farmers rely on fertilizer to boost yields of staple commodity crops such as wheat and soy.

Also, with fossil fuels in short supply or prohibitively expensive, greenhouses will remain unheated, cutting short the indoor growing season.

Meanwhile, major U.S. food companies are warning grocers that many staples will be available only in limited quantities, thanks to shortages of labor, materials, and adequate transport, CNN reported.

Scarce items will include McCormick gourmet spices, which have run out of glass bottles, Marie Callender’s pot pies, some Ben & Jerry’s ice cream flavors, and Rice Krispies Treats, according to messages from food companies CNN obtained.

Some suppliers also are telling retailers to cancel sale prices and promotions for these and other items in the weeks ahead so limited supplies can last longer.

Some suppliers are preparing for possible shortages of glass jars and packaging containers, CNN said.

During the week ending 3 October, 18 percent of beverages and bakery items, 16 percent of snacks, and 15 percent of candy and frozen foods were out of stock on the nation’s supermarket shelves, according to data from IRI, which tracks stock levels at major food retailers.

Before 2020, an average of 7 percent of items were out of stock, IRI noted.

Earlier this month, Kellogg told four grocery distributors that the volumes they receive of Pringles Snack Stacks, Eggo frozen pancakes, and Morningstar Farms plant-based hot dogs and bacon will be subject to limits.

Mondelez, which makes Oreo cookies, Philadelphia brand cream cheese, and Ritz crackers, among other foods, has warned at least one distributor of limited availability of some brands into at least January, due to labor and logistics “challenges.”

TREND FORECAST: Ending food shortages is not as easy as just planting more crops or waiting for more delivery truck drivers to apply for jobs.

The growing frequency of floods, droughts, and other extreme weather events will continue to make farm yields unreliable, pressuring prices higher for the long-term future in wheat, corn, and other crops that make up the foundation of entire nations’ diets.

Therefore, inflationary pressures on food prices will persist even as supply chain difficulties are minimized. Indeed, should food production escalate, companies will not lower prices on packaged/canned goods or in fast food sectors. 

COTTON FUTURES TRADE AT 10-YEAR HIGH

On 8 October, cotton futures closed up almost 7 percent in four days at $1.16 per pound, rising more than 6 percent for the week and 25 percent over 12 consecutive trading sessions to reach a price untouched since July 2011, CNBC and The Wall Street Journal reported.

Much of the price rise is due to China’s rising demand for U.S. cotton, thanks to a wrinkle in U.S. sanctions.

Much of China’s own cotton is produced in its Xinjiang province, where many activists and governments say China’s government has herded minority Muslim Uyghur people into slave labor camps to work the crops.

China denies the charge.

As a result of China’s policies, the U.S. and other countries have banned imports of products made using Xinjiang cotton, which we reported in “Top Trends 2021: The Rise of China” (30 Mar 2021).

However, the U.S. ban does not extend to cotton goods made in China from cotton grown elsewhere.

As a result, China is buying more and more American cotton to spin into clothing that it then sells back to the U.S.

Sales of U.S. cotton to China has soared 83 percent since 1 August, year on year, the U.S. agriculture department (USDA) reported.

This year, 62 percent of the U.S. cotton crop is in good or excellent condition, compared to 40 percent last year, the USDA said, meaning that the U.S. should be able to supply any amount that China orders.

China will use 24 percent more cotton this year than during the last two years, the USDA predicted.

China also is importing cotton from India and other countries, the WSJ noted.

However, the clothing industry is less concerned about higher cotton prices now than it was a decade ago when the fibers’ price passed $2 a pound.

“Then, we needed a prayer meeting,” Levi Strauss & Co. CEO Chip Bergh said during a 6 October earnings call cited by CNBC. “It’s a very different situation today.”

The company is passing on higher prices to consumers without losing sales, he noted, and will continue to do so as long as the market will stand it.

TREND FORECAST: Major makers such as Strauss may be able to handle higher cotton prices, but smaller companies are less so.

Spiking prices in cotton will force many small competitors to close their businesses or offer themselves for sale to bigger entities.

FED LOSING CHANCE TO CONTROL INFLATION, PRINCE WARNS

The U.S. Federal Reserve will be hard-pressed to control inflation, Robert Prince, co-chief investment officer at private equity giant Bridgewater Associates, warned in a 9 October Financial Times interview.

The view that today’s high inflation rate is “transitory,” voiced by Fed officers and other central bank officials around the world, is based on the idea that high inflation rates are caused by supply bottlenecks, as we noted in “Fed Holds Firm on Policy Despite 5-Percent Inflation” (20 Jul 2021).

However, current inflation rates are being driven at least as much, if not more, by a long-term shortage of high-demand commodities from tin to computer chips, Prince pointed out.

“The Fed is in a box,” Prince said, “because tightening [Fed policies] won’t really do much to reduce inflation unless they do a lot of it because it’s supply-driven—and if they do a lot of it, it probably drives financial markets down, which they probably don’t want to do.

“It’s just not going to be that easy to resolve these supply constraints, especially as  COVID remains an issue,” he added.

The yield on 10-year treasury notes topped 1.6 percent Friday, a measure of the market’s view that inflation will remain strong for the foreseeable future, the FT noted. (See related story.)

In Germany, yields on some government bonds reached their highest since 2013; in the U.K., where the Bank of England (BoE) has said it could raise rates this year to combat inflation, some yields rose to levels not seen since 2008.

The BoE’s warning that rates could rise in the next three months was “a wake-up call to investors,” Prince said.

He compared today’s plight to the 1970s, when OPEC cut oil supplies to the West, sparking rampant inflation while stagnating the economy.

“Raising interest rates isn’t going to increase oil supplies,” he said.

TRENDPOST: Prince is right. Normally, inflation might be subject to control through a tweak to central bank policies.  

However, these are not normal times.

Inflation has roots not only in record-low interest rates and buckets of cheap money sloshed out by Banksters.

Prices are being pushed higher by shortages of basic materials such as computer chips and copper in some cases. A persistent shortage of workers will continue to drive up wages.

Some prices will ease as supply-line disruptions untangle themselves; but central banks’ actions alone will not solve this round of worldwide surging prices.

TREND FORECAST: In times like these, authoritarian governments such as China’s have the advantage of being able to command private corporations and state-owned enterprises to open a new mineral mine or build a new chip factory, for example.

That power will lead those countries to respond more quickly and effectively than private-enterprise economies of the West, which are likely to become even more dependent on production in Asia as a result. 

DUH? INFLATION MIGHT LAST LONGER THAN EXPECTED, BANKERS SAY

Prices are rising faster than expected, prompting policy makers at the European Central Bank (ECB) and the Bank of England’s (BoE) chief economist to doubt previous forecasts that inflation’s pace would ease early in 2022.

In September, the ECB predicted that inflation would ease to 2.2 percent by the end of this year, drop further to 1.7 percent in 2022, and settle to 1.5 percent in 2023.

“The balance of risks is quickly shifting to great concern about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated,” Huw Pill, the BoE’s new chief economist, said in his first public statement since taking the job.

Isabel Schnabel, a member of the ECB’s executive board, echoed the view.

“It would be premature to assert that current price dynamics will fully subside next year,” she said in comments quoted by the Financial Times.

“There are several sources of uncertainty that might entail more persistent inflationary pressures,” she added.

In Europe, Norway and Poland already have raised interest rates in response to inflation; Brazil, New Zealand, and Russia are among other nations that recently hiked rates.

TREND FORECAST: As we have long noted, the Central Banksters were fully aware that inflation was not temporary. They know that high inflation was not only caused by them and governments pumping in trillions of cheap money to artificially pump up equities and the failing economies... They were fully aware of supply chain disruptions, shortage of basic goods such as copper and computer chips; and a shortage of labor, which pushes up wages.

However, they kept claiming inflation was short term because they did not want to disrupt the equity markets, knowing full well that when The Street knows interest rates are rising and it will cost them more to gamble, the overvalued markets will tank.

Now, with inflation an undeniable reality, a growing number of Fed officials are signaling the need to raise rates no later than next year, as we reported in “Will Fed Taper Bond Purchases?” (28 Sep 2021).

The Fed also has said that it will close out its $120-billion monthly bond-buying program, which it expects will take 12 months, before boosting rates.

Therefore, it is likely that the Fed will announce at its meeting next month that it will begin to wind down its bond purchases this year, laying groundwork for a rate increase no later than the end of 2022.

However, the real key is the inflation rate. The higher inflation rises, the quicker they will lower interest rates. 

BRAZIL’S INFLATION HIGHEST IN FIVE YEARS

Brazil posted a 10.25-percent annual inflation rate in September, the worst since 2016.

A drought has dried up the country’s hydropower industry, which normally provides as much as 70 percent of Brazil’s electric power. Utility companies have been forced to tap more expensive methods of generation, which pushed up electricity prices 6.5 percent in September from August and 30 percent so far this year.

Gas for cooking has soared 35 percent in price since January, leaving many poor Brazilian families to cook meals on open fires.

The drought dried up crops, driving an 11-percent hike in the cost of rice. A lack of pasture and feed for cattle has boosted meat prices 25 percent.

Consumer prices also have risen in the past few weeks in Chile, Colombia, Mexico, and Peru. 

Chile’s 12-month inflation rate reached 5.3 percent in September; Mexico’s rose to 6 percent. Colombia’s rate topped 4.5 percent. 

POLAND RAISES INTEREST RATE FOR FIRST TIME IN NINE YEARS

For the first time since 2012, Poland’s central bank has raised its base interest rate, moving it from 0.1 percent to 0.4 percent, a move that sent the value of the zloty, the country’s currency, up 1 percent against the euro.

Poland’s inflation rate reached 5.3 percent in September, its greatest in 20 years, the Financial Times reported.

The hike surprised analysts. Of 29 polled by Bloomberg, none had predicted it.

“Consensus was that the first rate hike would be delivered in November,” economist Piotr Bujak at PKO BP, Poland’s biggest bank, told the FT.

The bank may notch up the rate once again when it meets in November, then take a wait-and-see approach, Bujak noted.

Factors fueling inflation are beyond the reach of monetary policy, National Bank of Poland officials said in a statement, but the bank boosted its rate because food and energy prices will continue to move up and inflation “could be elevated longer than expected.”

The Czech Republic, Hungary, and Romania also recently bumped up interest rates.

NEW ZEALAND RAISES INTEREST RATES TO TAME INFLATION

New Zealand had one of the lowest COVID infection rates in the world because it closed its borders for an extended period and launched a range of stimulus programs to keep its economy functioning.

That strategy has led now to a nationwide shortage of key materials and pushed up home prices 30 percent, setting inflation alight and prompting the Reserve Bank of New Zealand to bump interest rates from 0.25 percent to 0.5 percent, the bank’s first rate increase in seven years.

The bank has warned of future interest rate increases, which it hopes will tamp down a runaway housing market.

The cost of building a new home was the chief contributor to New Zealand’s leaping inflation rate over the past three months, The Wall Street Journal reported.

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