SPOTLIGHT: INFLATION SPREADS

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AVERAGE AMERICANS CAN’T AFFORD AVERAGE NEW CAR

Even though computer chips have been in short supply, car makers had enough on hand to work through the spring and summer and even to make April a particularly strong sales month in the United States

Now, those stashes of chips are gone and auto companies can only make the number of cars that their scant deliveries of new chips will allow.

Car companies are making up a shortage in quantity by prioritizing the manufacture of the most profitable models and charging premium prices for them.

As a result, consumers paid an average of $42,368 for a new car in September, up 17 percent year on year, according to auto data service J.D. Power.

With demand pushing prices up, U.S. car dealers made about $4.2 billion in profits last month, a record for any September, despite having smaller inventories to offer consumers, Power reported.

BMW recently upgraded its 2021 profit outlook based on “continued positive pricing effects” that “will overcompensate” for being able to make fewer cars.

In an industry with margins that are notoriously thin, car dealers are now in the driver’s seat because consumers determined to have a new car “can no longer negotiate” prices, the WSJ said.

TREND FORECAST: Prices for new and used cars will remain elevated as long as commodities from aluminum to computer chips to petroleum remain in short supply. Prices will begin to lower when, and if, those items become more reliably plentiful.

Meanwhile, the high price of commodities will keep pressure on prices throughout the economy’s manufacturing sector, ensuring that inflation will run at a brisk pace well into 2022.

CENTRAL BANKS INFLATION FIGHT

Of 38 central banks monitored by the Bank for International Settlements, 13 have raised key interest rates at least once this year. 

Brazil and Russia began boosting rates last spring. Just this month, New Zealand, Poland, Romania, and Singapore bumped their rates for the first time since the COVID War began. (See “Brazil Raises Key Interest Rate,” 23 Mar 2021 and “Spotlight: Inflation Spreads,” 12 Oct 2021).

South American countries have battled double-digit inflation for years and now face the specter of consumers’ incomes being eaten by soaring prices.

To tamp down price pressures, Chile’s central bank doubled its base interest rate to 1.5 percent in August. Central banks in Colombia and Peru also have tightened policy recently.

However, the U.S. Federal Reserve and the European Central Bank (ECB) are standing pat, weighing higher rates against the risk of crashing equity markets or crippling a still-fragile economic recovery.

The two central banks, perhaps the world’s two most influential, are counting on consumers’ memories of a long period without inflation to keep their long-term expectations of higher prices low.

Consumers’ complacency would allow the central banks to wait longer to raise rates to tackle inflation.

Asian central banks also have been reluctant to jack up their rates for fear of tanking economies still weak after the global shutdown. 

Many Asian countries have far lower vaccination rates than their western counterparts and are still dealing with weak economies beset by another round of lockdowns. Vietnam is an example, which we cited in “With Vietnam Lockdown Sending Business to Other Countries, They Do an About-Face” (5 Oct 2021).

Inflation was touched off in March by consumers’ surging post-lockdown demand. Suppliers were unable to keep pace, due to shortages of materials and workers as well as clogs in supply chains.

Also, manufacturers and other suppliers had expected a more gradual economic recovery and had not expanded production or transport facilities during the global shutdown, The Wall Street Journal said.

By August, inflation in the Group of 20 countries, the world’s richest, was running at its fastest clip in 10 years.

Because inflation has not eased, central banks now confront the prospect of it embedding itself in the global economy, most likely as a wage-price spiral, the WSJ noted.

In that scenario, consumers expect inflation to persist and demand higher wages to stay even financially, forcing retailers and manufacturers to raise prices to pay higher wages, spurring consumers to demand higher pay.

TREND FORECAST: The Fed and ECB are delaying raising rates in order to keep markets from panicking. However, inflation and the growing threat of a wage-price spiral will force them to join their counterparts and raise rates sooner than they now say. And when they do, equites and the economies will rapidly decline in proportion to rate hikes. 

INFLATION STRENGTHENS IN SEPTEMBER

As the U.S. Federal Reserve Banksters and Wall Street Gang were claiming that inflation was “temporary,” and then changed their bullshit to it being “transitory,” we said it would keep rising and be a key element in Dragflation... the economy goes down, inflation goes up.

Indeed, we had warned of the coming wave of inflation as far back as 19 January this year in our analysis “Price Hikes Lurking Beyond Pandemic.”

Rising prices for food and shelter led September prices to rise 0.4 percent from August to an annualized pace of 5.4 percent, the highest annual rate since 2008, the U.S. Labor Department reported.

Excluding food and energy, the so-called “core” inflation rate rose 0.2 percent last month, with costs of airfares, clothing, hotel stays, and used vehicles dipping.

Residential rents jumped 0.5 percent, the greatest monthly spike since 2001, the department noted. Costs for household furnishings and supplies rose at a record annual rate of 1.3 percent; the cost of new vehicles also was up. 

And while inflation is going up wages are not keeping pace: hourly earnings rose just 0.2 percent in September, leaving people with 0.8 percent less buying power than a year ago. 

Indeed, people are feeling it in their pocket. According to a survey by the Federal Reserve Bank of New York, consumers’ expectations for inflation rose to record highs last month.

And the U.S. producer price index, which measures what factories charge wholesalers and distributors, jumped 8.6 percent in September from a year earlier, the sharpest yearly rise since 2010.

The index was up 0.5 percent for the month, 0.1 percent more than the consumer price index, indicating that consumers are likely to face higher prices soon for a range of goods.

TRENDPOST: In January, more than 64 million Social Security recipients—about 20 percent of the U.S. population—will receive a 5.9-percent increase in their benefits, the biggest single boost in 40 years, based on the rising cost of living.

Much of those gains will be gobbled by higher prices. While there is concern that with more money to spend that too can add to inflation since there are shortages of products, we do not see this as an inflationary threat.  

More importantly, the stiff inflation figure is likely to spur the U.S. Federal Reserve to start winding down its $120-billion monthly bond-buying program this year. And as we have forecast, when the cheap money flow dries up, equities and economies will sink.

TREND FORECAST: With inflation rising much faster than wages, fewer people will be buying homes and more will be renting. Rising rents will send even more money to the private equity firms that have been snapping up rental houses by the thousands across the country, which we reported in “Invitation Homes to Buy $1 Billion Worth of Houses This Year” (1 Jun 2021) and “Private Equity Partners Target $5 Billion in Rental Houses” (27 Jul 2021).

ENERGY SHOCK POISED TO FUEL EUROPEAN INFLATION

Europe’s spot-market price of natural gas has almost tripled this year, but consumers’ gas bills are up only about 9 percent so far, according to a UBS analysis, translating to an impact on inflation of a 0.4 percentage point.

The region’s 50-percent jump in oil prices has nudged inflation by six-tenths of a percent.

However, consumers are unlikely to remain so sheltered from energy cost increases for long.

Energy bills make up a whopping 9.5 percent of Britain’s consumer price index and 6 percent of Europe’s.

Also, Europe is shifting toward greater dependence on gas as it seeks to reduce carbon emissions to meet its targets under the Paris Accords.

The U.K. generates a third of its electricity using gas, Germany a quarter, and France 15 percent.

Spiraling energy prices are responsible for the greatest share of the region’s inflation, which UBS says will average 2.4 percent for the year, a bit higher than the European Central Bank’s target of “below, but close to, 2 percent.”

TREND FORECAST: Prices are only part of Europe’s “energy crisis;” the other part is shortages, especially of natural gas, which already have struck Britain, closing factories and threatening food supplies, as we reported in “Will Surging Gas Prices Sink UK, EU Economies?” (21 Sep 2021).

As winter’s heating season sets in, gas prices and shortages will spread havoc through the region’s economy, raising prices and worsening shortages of a range of consumer wants and needs.

METALS PRICES SURGE ON PRODUCTION CUTS

On 14 October, prices for zinc’s January deliveries jumped 3.7 percent to $3,528 per ton on the London Metals Exchange, their highest in more than three years, after Nystar, a major processor, said it was halving production at three European plants.

Soaring energy costs and the European Union’s tax on carbon emissions made it “no longer economically feasible” to operate the plants at full capacity, the Belgian company said in a statement.

Natural gas prices have risen steadily across Europe in recent weeks and remain in record territory amid vanishing supplies.

Aluminum prices climbed 1.6 percent to $3,117 a ton on the same day, the most since 2008, due in part to China’s production cutbacks, estimated to be three million tons this year, or 10 percent of capacity, as the country attempts to reduce its carbon emissions and deal with power shortages and scarce fuel supplies.

Processing aluminum is particularly energy-intensive.

Copper, up 27 percent this year, gained 2.6 percent to $4.63 a pound in New York, up 8 percent last week, closed today at nearly $4.724 per pound...near its all-time high.

Nearing levels not seen since 2007, today, zinc prices bounced back above $3,700 a ton. The price pinch threatens to further hobble an already weakening global economic recovery; zinc is needed to make steel and aluminum is key in everything from food containers to automobiles.

SOARING FUEL PRICES CRASH AIRLINES’ HOPE OF ONGOING RECOVERY

Airlines’ recovery from the global economic crash has been slow and bumpy. 

After strong summer bookings as people emerged from the shutdown, the resurgent Delta virus kept more consumers home. Many have canceled or cut back on travel plans over the winter holiday season.

Now air carriers’ hopes for a financial lift-off are being dashed by skyrocketing fuel prices.

The price of jet fuel has climbed to $750 a ton, about double what it was a year ago, according to the International Air Transport Association.

Delta Airlines now says that sky-high fuel prices will push the company back into red ink for this quarter, right after booking only its second profitable quarter of the last six.

Carriers are leery of passing those new costs through to passengers, which already are scarce; many airlines are still discounting ticket prices to lure travelers back into the skies.

Also, the companies are reeling from heavy losses in the hedging market.

Expecting prices to rise last year, many airlines signed contracts to buy fuel at prices at or near prevailing prices, a normal hedging practice in the industry.

When the COVID virus struck, prices crashed but those carriers still were contractually obligated to buy their fuel at what had become above-market prices.

Ireland’s Ryanair lost €300m in its 2020 financial year after it took a strong hedge position against high oil prices that tanked when the virus arrived.

“Most airlines suffered huge losses from fuel hedges last year as demand imploded in the face of the COVID pandemic and they were left holding contracts for delivery at prices well above spot,” aviation analyst Mark Simpson at Goodbody told the Financial Times.

Having been burned in the hedge market last year, several airlines failed to hedge this year, leaving them liable for paying the full price of today’s much costlier fuel.

One CEO of an unnamed European airline told the FT he remained firm in his decision to avoid the hedge market, noting that for every time hedging paid off, there was another time that fuel prices fell, leaving carriers with a loss.

This has been one of those times.

DROUGHT SPIKES OAT PRICES

The price of oats reached $6.60 a bushel on 15 October, more than doubling their cost from a year earlier.

Droughts have seared key growing areas, including western Canada, North Dakota, and parts of Iowa and Wisconsin.

Also, North American farmers planted 13 percent less oats this year, switching instead to corn and wheat, which were fetching higher prices.

As a result, this year’s oat crop will be the smallest on record, according to the U.S. agriculture department.

Oats not only feature in baked goods, protein bars, and breakfast cereals; farmers also feed them to livestock and poultry.

“There will not be much in the way of high-quality oats for consumers to buy this year,” grains analyst Jack Scoville at Price Futures Group wrote in a research note. 

ENERGY CRISIS PUSHES CHINA’S COAL FUTURES TO RECORD PRICES

On 14 October, the price of coal futures on the Zhengzhou Commodity Exchange shot to $263 a ton, up 8 percent on the day and 34 percent for the week, setting five consecutive records and notching the biggest weekly gain ever recorded, the Financial Times reported. 

China has sought to cut back coal production over concerns of miners’ safety and poor air quality in its cities.

The drive has combined with local governments’ efforts to reduce carbon emissions to create energy shortages across the country, worsened by recent floods that shut down coal mines and some generating plants in key industrial areas.

To halt the crisis, China boosted coal imports 76 percent in September, year over year, and began rationing electricity, favoring residential areas over industrial users.

As a result, steel, glass, and aluminum will be in short supply, further squeezing margins in China’s already troubled real estate development industry, the FT said (see related stories in this issue).

Costs to China’s factories already have been rising, with the producer price index soaring 10.7 percent last month (see related story in this issue).

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