It’s the Food Inflation, Stupid!

The weak dollar has fueled U.S. exporters, almost without regard to sector. GM is selling plenty of automobiles overseas, edging out Toyota for worldwide sales. Caterpillar (CAT) is selling tons of earthmoving and construction machinery, mostly unaffected by the US Housing slowdown; Their fastest growth is overseas. Microsoft (MSFT), Cisco (CSCO), Intel (INTC) have all seen their overseas sales spike upwards.

The list goes on and on.

Domestically, however, things are less cheery. Automobiles have been in a recession, suffering contractions for several Qs. Housing is in a deep recession, if not a depression.

And now, the next domino is falling: Retail Sales. Unless we see a notable uptick, Retail sales are in danger of slipping into a recession in Q4 2007 and Q1 2008.

In the US, Retail has clearly softened. And, if we actually look beneath the headline numbers, we see what little growth that was reported yesterday for October was primarily the result of inflation — and in particular, FOOD INFLATION.

Consider the October US retail sales we mentioned yesterday. The big winners were the warehouse sales, whose month over month gains were  boosted by hefty increases in Food prices.

Wal-Mart (WMT) sales increased a disappointing 0.4% — +1.1% was expected. This was surprising, as Wal-Mart engaged in very early, very heavy holiday/promotional discounting.

What was he impact of inflation on Wal-Mart’s sales?  All of the growth was in Sam’s Club, which was +4.2% thanks to food sales.  October sales at Wal-Mart were flat ex-Sam’s Club; Back out gasoline sales, and sales were actually a negative 0.3% (ex-gasoline).

Target (TGT) same-store sales increased 4.1% (+2.4% consensus).

Costco (COST) same-store sales jumped 7%

Again, nearly all of these gains were food cost increases.

How is the holiday season shaping up? The Int’l Council of Shopping Centers said October sales increased 1.6%, the worst October in 12 years. And the National Retail Federation and TNS Retail both forecast the smallest holiday sales growth in five years.

It’s the food inflation, stupid!

 

Chart courtesy of WSJ

See also:

Retailers Report Tepid Sales
JAMES COVERT
WSJ, November 9, 2007; Page A4
http://online.wsj.com/article/SB119452397863386405.html

Stores See Shoppers in Retreat
NYT, MICHAEL BARBARO
November 9, 2007

‘Affordable Luxury’ Stores Feel Economy’s Pinch
VANESSA O’CONNELL
WSJ, November 9, 2007; Page B1
http://online.wsj.com/article/SB119456835990487306.html

Why Fed Expects Growth to Slow
Bernanke Says Credit Fears Are Growing as Oil, Dollar Threaten to Fuel Inflation
GREG IP
WSJ, November 9, 2007; Page A2
http://online.wsj.com/article/SB119452853756986479.html

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  1. kharris commented on Nov 9

    Half points for this one. Your ill-supported obsession with inflation may have led you into error. WalMart explicitly attributed sales gains to grocery and drug sales. That is not true in every other case. In addition, big box discounters have moved increasingly into food sales. There is no grocery category in the chain store data, so we cannot tell how much of the food sales gain in price and how much is a shift in market share from stores not included in the report to those that are included. We may very well be seeing a shirt in market share.

    Your eagerness to see inflation under every rock has led to a(nother) conclusion before the case is proven.

  2. kharris commented on Nov 9

    Half points for this one. Your ill-supported obsession with inflation may have led you into error. WalMart explicitly attributed sales gains to grocery and drug sales. That is not true in every other case. In addition, big box discounters have moved increasingly into food sales. There is no grocery category in the chain store data, so we cannot tell how much of the food sales gain in price and how much is a shift in market share from stores not included in the report to those that are included. We may very well be seeing a shirt in market share.

    Your eagerness to see inflation under every rock has led to a(nother) conclusion before the case is proven.

    ~~~

    BR: I’m even seeing inflation in comments — I could have sworn I saw this post before!

  3. ferd mertz commented on Nov 9

    what a difference a few months makes! recall before the credit crisis hit , the s&p broke out to 1541, above the previous high, on the back of “great” retail numbers that were similarly boosted by food inflation. there were some grumblings about how the big rally that day was B.S. so here we are, a few months later, and inflation no longer appears to be the dear friend of equities. what’s a central banker to do!?!

  4. Jeromy commented on Nov 9

    why is same store sales a more used indicator. Shouldn’t it be overall sales? If there is another store opening nearby an existing store, it will undoubtedly take sales away.

  5. Winston Munn commented on Nov 9

    Expanding on this theme by comparison with another oft-contemplated concept, I find it amazing how department stores’ results accentuate the polarization of prosperity in the U.S. Virtually all the “middle class” stores are down, but Saks and Neiman Marcus roll merrily along, oblivious to the pain felt by the average citizen.

    Something is very wrong in this country.

    Vanity Fair has an interesting article by Joseph E. Stiglitz, who writes: “But the Bush administration had its own ideas. The first major economic initiative pursued by the president was a massive tax cut for the rich, enacted in June of 2001. Those with incomes over a million got a tax cut of $18,000—more than 30 times larger than the cut received by the average American. The inequities were compounded by a second tax cut, in 2003, this one skewed even more heavily toward the rich. Together these tax cuts, when fully implemented and if made permanent, mean that in 2012 the average reduction for an American in the bottom 20 percent will be a scant $45, while those with incomes of more than $1 million will see their tax bills reduced by an average of $162,000.

    ….Inequality is now widening in America, and at a rate not seen in three-quarters of a century. A young male in his 30s today has an income, adjusted for inflation, that is 12 percent less than what his father was making 30 years ago. Some 5.3 million more Americans are living in poverty now than were living in poverty when Bush became president. America’s class structure may not have arrived there yet, but it’s heading in the direction of Brazil’s and Mexico’s.”

    Currently, the Department of Commerce states that the “productive part” of the U.S. economy – that part that actually makes things, causes stuff to move around, etc – is only 28%.

    The other 72%, then, must be what Russ Winter terms “ficticious capital”, and has no productive use other than to move prices. This ficticious capital is simply expanding debt.

    In the past, we have seen manufacturing-led recessions; in our current setting, it will be a ficticious capital recession – led by tightening credit and contraction of debt that will unravel the U.S. economy.

    It really is different this time.

  6. W.Edwards commented on Nov 9

    Jeromy,

    I guess the theory of opening a new store is to tap a marketplace where the people don’t currently have ready access to your chain is very large and the effect of stealing/cannibalizing sales from other stores would be very, very small. Therefore, the overall health of the market for that chain’s goods can be measured by change in same-store sales.

    If stores are opened that too close together, the new store will cannibalize the sales of the existing store. You may see a rise in total sales due to some new customers but what is mainly happening is that you’re spreading the same sales around to more stores, incurring a lot more fixed costs and overhead in the process. Obviously not a good thing and a sign of poor company strategy/management.

    If the chain have been prudent and are not opening a store every two miles from one another, a reduction in same store sales is a broader indicator of the economy or, at the very least, the interest in your stores.

  7. 12th percentile commented on Nov 9

    the other day I was doing my shopping and marveling at the much higher prices in the food aisles. I enjoy eating the planter’s peanuts and actually used to work for Nabisco within that operating company (peanuts being one of the few products I will eat from that company after seeing how they all are made). I was thinking to myself how inflation hadn’t hit my peanuts yet and was wondering why. Still 2 for $5. But this time around they had a new fancy package to boot. Same price but a new shape that looked like Mr. Peanut!! Of course in order to give you this fancy new package they were only able to get 14 oz into the jar instead of the standard 16 oz. Do they count that sort of thing in inflation?

  8. TGM commented on Nov 9

    U.S. retail sales may overstate domestic demand,as Canadians flock south of the border to shop in the U.S. where retail prices are significantly lower on a currency adjusted basis than in Canada, now that the Canadian Loonie is soaring. In very rough terms, the Cdn economy is 1/10th the size of the U.S., so every 1% of Cdn retail sales diverted to the U.S. boosts U.S. retail sales by .1%.

  9. Rich_Lather commented on Nov 9

    W.Edwards,

    That’s not what I am seeing Wal-Mart doing in Florida. Wal-Mart is on the offensive to overtake Publix sales by building new stores right down the street from Publix, even when the local economy is saturated with several existing Wal-Marts.

  10. will rahal commented on Nov 9

    Since 1970, the US Trade Deficit has improved on each and every recession(lump
    1980-82 as one recession).
    I posted this observation a few weeks ago.
    See “International Trade and Recessions”

  11. zero529 commented on Nov 9

    “the other day I was doing my shopping and marveling at the much higher prices in the food aisles.”

    In my house we eat a lot of ice cream and frozen pierogi.

    Ice cream: the “half gallon” is now 1.75 liters, and you’re lucky to pay $2.99 now instead of $2.50 (29% increase in unit price)

    Pierogi: Package now holds 10 instead of 12, and you pay $1.99 instead of $1.79 (33% unit price increase)

    Worst part is that I look to ice cream when I get ticked off about things.

  12. zao commented on Nov 9

    Inflation still contained. Import prices EX PETROLEUM up 3.5% yoy (0.5% on the month). But as Ben says, if you buy things made in America exclusively, there is no problem. He should submit a list of stuff he buys so I can model my buying behavior as he prescribes.

  13. Rob Dawg commented on Nov 9

    Costco sells gasoline. Excluding gasoline price inflation, U.S. comparable sales in October would have been 5%. In addition, significantly stronger foreign exchange rates, particularly in Canada and the U.K., positively impacted October’s international comparable sales results. Excluding this effect, international comparable sales increased 4% in October. [from http://biz.yahoo.com/iw/071108/0325899.html%5D

  14. Strasser commented on Nov 9

    “Your eagerness to see inflation under every rock has led to a(nother) conclusion before the case is proven.”

    KHarris, with all due respect, you must be living under a rock or in another country or else have so much money (and someone else does your buying) that you haven’t a clue what normal people around us are experiencing. There is nothing that has not increased and considerably so.

  15. Ross commented on Nov 9

    No inflation? Yesterday my mechanic for the past 24 years called and told me my wife’s Honda needed a new catylitic converter. This is a 2001 Accord with about 85,000 miles. I had never had to replace a cat converter before. Cliff informed me that he is seeing more and more of this. Seems most mfgr’s are using narrow honeycomb substrate and less precious metal. My question is, do hedonics work in reverse? Shouldn’t that $400 I paid be considered a back end price increase?

  16. Rich_Lather commented on Nov 9

    “But as Ben says, if you buy things made in America exclusively, there is no problem.”

    We only live in a global economy when it is convenient to your argument, I suppose.

  17. 12th percentile commented on Nov 9

    cat converters and coffee makers

    I few months ago my wife and I decided to give in and buy one of those fancy Swiss coffee makers from William Sonoma. My brother has had one for a few years and we always liked going to his place and drinking lots of his coffee. We bought the low end model ($1,000). The first one didn’t work so well and then just quit working algother within a week. The next one refused to function on a regular basis. So, we decided to go get our money back. The woman at Sonoma fessed up on the second return and said that they get about 1 return a week now. She said they started making the parts in china last year and ever since then they have been getting many returns.

    It really wasn’t that convenient anyway an the french press makes better coffee to boot

  18. bsneath commented on Nov 9

    Exports are up $200 billion YOY. IMO this indicates that the lower $ is having the desired effect. Import prices are higher and this will led to more domestic substitution for imported goods (such as autos, domestic travel, beer etc.).

    These are very favorable developments as global imbalances are beginning to moderate – although we have a long ways to go.

    This is also great news for the economy (the real one that is) as exports take up the slack while construction falters.

    Yes, Americans will see less purchasing power for their dollar, but this is primarily the flip side of having excessive purchasing power during the days when global exporters were subsidizing our spending habits by purchasing US Treasuries in exchange for Toyotas and toys.

  19. Jose Padilla commented on Nov 9

    BSNEATH:

    The U.S. benefits from the dollar being the world’s reserve currency. It allows us to run massive trade deficits. They give us oil, autos, electronics, etc. We give them pieces of paper. But the deal is, America is supposed to protect the value of the dollar. If the dollar falls far enough, another currency will become the reserve currency and Americans will only be able to consume what they actually produce. The pound sterling was once the reserve currency, but no longer.

  20. michael schumacher commented on Nov 9

    US exports can’t even BEGIN to make up for the loss of construction revenue(s). Construction is what powered this last bubble creation, albeit on the back of the cheap easy money.

    Thanks I needed a good laugh…..

    Ciao
    MS

  21. lurker commented on Nov 9

    If you don’t think the average American is noticing, take a look at the plunge in consumer sentiment. Bad time of the year for consumers to wake up and sniff the more expensive Folgers…

  22. LAWMAN commented on Nov 9

    Was just up in Canada a couple of weeks ago. Numerous news stories about Canadian retailers getting killed b/c Canadians are increasingly turning to internet purchases from US companies.

    Alot of talk about major price slashes on the way in Canada. They are happy that their dollar is stronger, but I think it has been too much of a good thing too quickly.

    P.S.: Pretty sad that my best “investment” has been the growth in value of the Canadian money sitting in my sock drawer.

  23. KoombuyaMFs commented on Nov 9

    IP Address 96.228.145.183:
    Posting privileges revoked
    all prior comments unpublished

    buh bye . . .

  24. Cory commented on Nov 9

    STAG*&^%^$##@!!! FLATION…

    There I said it, WOW, feels good.

    Is it any surprise that Maslow’s hierarchy would show itself so evidently with so few acknowledging it.

    Chinese rurals are not working for plasma TVs, they’re working for food. That’s where the inflation should show first and that is what seems to be occurring. C.

  25. michael schumacher commented on Nov 9

    Welcome to YET another round of “oversubscribe the repo”

    brought to you by that bastion of honesty ans inflation fighter…..Ber”hank”ce.

    http://www.newyorkfed.org/markets/omo/dmm/temp.cfm

    To the poster who asked about the repo’s…
    It’s not as simple as out with the old and in with the new. That money gets directed at whatever the brokers want to direct it at. As Long as they pay the premium to access the money they can do whatever they want with it as long as it is returned at the end of the cycle……to be replaced by another round of money.

    ciao
    MS

  26. v commented on Nov 9

    wouldn’t it be weird if there was some sort of food hyperinflation (with kicking out the immigrant labor and all) and with weak dollar, couldn’t import enough food, and all we ate were nutritionless synthetic stuff and lost a ton of weight and all the obesity related health problems disappeared?

  27. michael schumacher commented on Nov 9

    sound like soylent green…..

    SOYLENT GREEN IS PEOPLE AHHHHHHHH

    Ciao
    MS

  28. Fred commented on Nov 9

    v, if anything, having less money to spend on food will drive more people to eat 99c value meal crap. It is nutrionless and synthetic, but it sure as hell won’t make you lose any weight.

  29. lewis commented on Nov 9

    I see where the import prices are now starting to show inflation, so with Wal-Mart prices going up along with gas and food, that pretty much defines “core” inflation for a lot of folks I know. But since nothing at Walmart or the gas is made in the US, we can’t count those price rises….

    Meanwhile, I am flabergasted to watch the ten year yields decline so low. One of the biggest holders of treasuries in the history of the world is making louder and louder noises about dumping them, and people are lining up to buy them. Must be the same folks who piled into tech stocks, then spec houses to flip. I sure am glad they are finally buying something “safe”, well at least in the short term…..I wouldn’t mind holding that ten year for one year, but the next nine scare the heck out of me so I’ll pass on all ten, cause finding someone besides Bill Gross to buy them next year and beyond may get really tough.

    Meanwhile, some of the credit card outfits have started noticing the increasing bad debt, these guys seem a lot sharper than the subprime guys who ignored it for years. I had assumed that the minimum payment thing would let folks pile on bad credit card debt for years a la the subprime but I MAY be off on that one….so, yes, if my former MEW folks do get cut off at the credit card window, they may be out of ways to float along and sales across the board will decline really soon. Think we ought to investigate credit card companies aggregate numbers to see what is really happening as I think that holds the key to how long the consumer can stay afloat in his sea of debt….

    Lewis

  30. Critic commented on Nov 9

    My local Costco finally added gas sales this year, pushing their sales from this store up dramatically. Costco stores are some of the highest volume retailers of gasoline where we live, with the lowest prices for members.

    How many Costco stores like this one have added gasoline sales?

  31. kroniks commented on Nov 9

    How does Cisco’s export gains compare to its loses in domestic sales? I was reading yesterday that among its top clients were the US banks, autos and retail industries.

  32. wunsacon commented on Nov 9

    Winston, it’s de facto oligarchy. The productive capacity of the planet is increasingly catering to the needs of a relative few.

  33. JWC commented on Nov 9

    I was just complaining about the cost of groceries yesterday. The bag of romaine mix that I buy has gone up in price. The bag “looks” the same on the outside, but we only get two meals out of it instead of the three we used to get. Fresh produce is horrible. I now only buy meat when it is on sale. I don’t know how families with kids are doing managing.

  34. discarded lies – hyperlinkopotamus commented on Nov 9

    Another glum spot in the economy: the only reason retail sales are up is because of food inflation

    Another glum spot in the economy: the only reason retail sales are up is because of food inflation

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