Rising Crude Oil Pushes Consumer Prices Higher

I’m not sure what to make of the Core-heads — that motley collection of blinker-eyed ostriches who either claim there is not much in the way of inflation, or refuses to acknowledge the impact Oil prices has on everything else we consume. Despite all of the obvious price data and anecdotal evidence to the contrary, they insist there is little or no inflation.

Policy makers who believe this tripe are making a serious mistake. Why> Because of what Oil is used for:
In the US, only half of the Crude Oil we consume is for gasoline and
other energy products. Petroleum makes its way into many, many other
manufactured goods.

Apparently, the Core-heads must not ever go shopping. Despite the absurdity of looking at near $100 Oil and claiming there is no inflation, it appears they don’t look at MANY other prices either.

To wit, this discussion on the push through impact of Crude prices on the costs of so many other consumer goods:

"Let the consumer beware: Costs are going up on almost everything the average American family consumes.

Blame it on crude oil.

The rocketing price of crude oil is not only sharply hiking the costs of fueling the car and heating the home, but is bidding up prices on the raw materials that go into goods from produce to perfume.   

At the same time, the push to develop ethanol as an alternative fuel through corn and similar products is inflating the cost of feed for cows, pigs and other farm animals – and that also increases the prices consumers pay.

What specific products are impacted by Oil prices? Well, anything that gets shipped — which includes pretty much everything.

•  Wrigley (WWY) raised prices 10% in the second and third quarters on its popular gums and candies.

• Hershey Co. (HSY) On an earnings call last month, the COO said it may very well jack prices again in January when there’s a "better view of the commodities situation."

• Kraft Foods Inc. (KFT) CEO told investors they had to raise prices to cover "input costs" of raw materials for food as well as resins for containers and Wax for packaging frozen foods.

• Procter & Gamble (PG) lifted its prices on Coffee by 8%, on fabric softeners  by 9%. The CFO said more price hikes are coming:

– 5% – 12% increase on personal cleansing products in January;
– 5.5% rise on paper products in February;
– 5% – 9% on disposable diapers
– 3% to 5% on blades and razors in February.

• Starbucks Corp. (SBUX) boost prices by 9 cents per beverage (to cover milk price rises), and then another 5 cents (rising costs of labor and energy).

• Colgate (CL) will raise prices on pet foodin Q4 by 6% – 8%.

• General Mills (GIS) has raised prices on some, while shrinking the size of others.  The CEO said "We are actively monitoring the need to pass along additional input cost pressures as they arise."

• Cooper Tire & Rubber (CTB) raised tire prices 5% in June, and another 4% in October; Bridgestone, Firestone, Fuzion and other tire lines also raised their prices by about 5%.

~~~

I am not saying everyone who emphasizes the Core to the detriment of true inflation is both a liar and an
idiot — but if you were just pick one one of those monikers, you won’t be too far off . . .

>

Source:
Oil’s long tail
Jennifer Waters
MarketWatch, 8:17 PM ET Nov 9, 2007       
http://tinyurl.com/2m7c2c

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What's been said:

Discussions found on the web:
  1. Michael Donnelly commented on Nov 12

    For the longest time about (1980 – 2000) Core inflation was higher than Total inflation when averaged out over a year or two.

    But these past 5-7 years have seen an unbelievable decoupling between Total and Core and the Core-heads haven’t noticed it yet.

    Maybe they are forecasting a 3 year recession allowing oil to fall to $20 and that brings the total inflation line under Core long enough to balance the two out ?

  2. Mort Glickman commented on Nov 12

    The labor price of Java developers dropped 15% the last year.

  3. Francois Theberge commented on Nov 12

    “The labor price of Java developers dropped 15% the last year.”

    I suggest you call the campaign strategists for the Republican presidential candidates. This sounds like a slam dunk political winner that shall reassure every voter in America concerned with the state of the economy.

  4. mhm commented on Nov 12

    “I am not saying … is both a liar and an idiot”.

    I like the “AND”. My take is that some are just liars, the others are plain idiots.

    It is not that the core number has no technical use. It does. But now it is being used to deceive the general population, and that taints the whole thing.

  5. Ross commented on Nov 12

    They are liars, cheats, and thieves but not idiots.
    Only one sure cure. Tall tree – short rope.

  6. dan commented on Nov 12

    Why are L/T interest rates near record lows if inflation is understated and rising? I thought fixed income investors were “smarter” than equity investors.

    ~~~

    BR: Perhaps the fixed income markets are expecting a major economic slowdown and/or Fed rate cuts.

    You should consider taking an Economics 101 class, Dan

  7. pmorrisonfl commented on Nov 12

    > The labor price of Java developers dropped 15% the last year.

    For the Java developers in question, that’s a reduction in wages. Do you think it’s the ‘skills gap’ that is, uh, destroying their buying power?

    Luckily I’m a C# developer, so the rules of economics don’t apply in the same way to me (Just kidding).

  8. jimbo commented on Nov 12

    You really come across as ‘The Panicky Guy’ in this article. Take a deep breath.

  9. Bud Hovell commented on Nov 12

    I believe Marie Antoinette summed up rather nicely the general attitude of liars well-compensated on the public payroll: “Let them eat cake.”

    Which, of course, really means “let them eat sh*t.”

  10. a guy called john commented on Nov 12

    I spent the weekend reading Michael Pollan’s The Omnivore’s Dilemma, which initially got me to thinking about the gigantic gov’t push to ethanol that is mentioned in the above quote. Then I had another forehead-slapper when I read these quotes:

    One-fifth of America’s petroleum consumption goes to producing and transporting our food.

    […]

    Assuming […] twenty-five pounds of corn a day [a steer] will have consumed in his lifetime the equivalent of thirty-five gallons of oil — nearly a barrel.

    And yet, according to the former agricultural secretary this wasn’t supposed to happen!

  11. Douglas Watts commented on Nov 12

    I buy food and gas with credit cards, so these increases will not affect me for several years, upon which time the economy will be humming along quite healthily.

  12. Bud Hovell commented on Nov 12

    “I buy food and gas with credit cards, so these increases will not affect me for several years, […]”

    Check the interest rates for carrying that cost, John, and I guarantee you an epiphany.

  13. michael schumacher commented on Nov 12

    bud-

    Ber”hank”ce already gave us our Antoinette moment when he lowered rates for his banking buddies.

    and he stands ready to do it again…..I’m actually surprised that nothing was done over the weekend. The Fed likes to do sneaky shit when they think no one is looking (bonds closed early friday and closed today).
    Ciao
    MS

  14. MarkTX commented on Nov 12

    Dan, I think you hit on what has become a

    HUGE investing “catch 22”.

    There is so much USD “money” chasing bonds (assets)

    in money funds, mutual funds, China, oil money, etc…

    that the asset/bond prices are in a bubble.

    High bond price=low yield.

    Completely destroys the concept of “textbook investing” or what a person may have learned years ago in college about how things should work.

  15. tjofpa commented on Nov 12

    Barry;

    The items u list are small ticket items that we purchase every month. The drop in Big Ticket items that we purchase every 4 or 5 years is more than compensating. (/off)

  16. Boom2Bust.com commented on Nov 12

    FYI, Federal Reserve Governor Frederic Mishkin said last month that changes in price indexes without food and energy “provide a clearer picture of underlying inflation pressures. If the monetary authorities react to headline inflation numbers, they run the
    risk of responding to merely temporary fluctuations.” Talk about a Core-head…

  17. cm commented on Nov 12

    Well, Bush senior was ridiculed for his surprise at checkout scanners. There sure was a reason for his ignorance, namely not shopping in the stores of the riffraff, and probably having his shopping done by his handlers.

    I presume all the pundits and little leg-biters still do their own shopping, through the more prominent of them possibly also push it on to the “help” or the spouse.

    Aside from that, when one is in the shill business, one can probably manage a good deal of cognitive dissonance to maintain that paycheck.

  18. Muckdog commented on Nov 12

    But BR, despite the few things you’ve listed here, the PPI and CPI show no evidence that rising oil prices have had much of an impact. Maybe because as folks send more money to OPEC, then spend less money at the malls?

    And your hand-picked list of rising prices didn’t include that big-screen TV you went shopping for this weekend. How are prices there? How are prices on all technology goods? Printers, scanners, cameras, PCs, etc?

    (I just bought a pen tablet for my PC, and it was extremely cheaper and of higher quality than the ones I was looking at just a few years ago).

    Regarding rising perfume prices, my company recently implemented a “scent-free workplace.” Save the Old Spice for the night out with Mrs. Big Picture!

    LOL

    The labor price of Java developers dropped 15% the last year.

    I’m in IT. Tons of 22 yr old Java programmers coming out of college and available overseas. Supply vs. Demand.

  19. undergroundman commented on Nov 12

    When everything goes up in price, we have inflation. When some very important items go up but wages don’t go up, then people have reduced purchasing power — but there’s not inflation.

    I don’t know whether inflation is worse than people say it is, but it could be that higher oil prices are just a reflection of scarce oil rather than an oversupply of currency in the economy. People will have shift their spending away from oil where possible or spend less on other items.

  20. mhm commented on Nov 12

    “I just bought a pen tablet for my PC, and it was extremely cheaper and of higher quality than the ones I was looking at just a few years ago”

    That is the opposite of what’s going on with edible goods. They were cheaper, bulkier and of higher quality just a few years (months?) ago.

  21. wnsrfr commented on Nov 12

    If Muckdog ate his keyboard instead of food from the grocery store, would that be the same as eating his words?

    p.s. Java developers are cheap because Java sucks :)

  22. a guy called john commented on Nov 12

    just to make what should be some obvious points:

    everyone buys food. everyone buys gas. everyone does so every week of every year. aggregated, the extra amount that a family of four pays in fuel and food in a year is more than the cost of that new tv that they don’t need to survive. it’s more than the cost of the new tv and the new camera combined. it’s more than the cost of a bunch of stuff that people simply Do Not Need.

    btw: anecdotally, the parking lot at my grocery store was packed on saturday. also, on friday night there was a line into the street at the cheapest gas station that i know of in chicago. should i infer that the economy is rocking based on this evidence?

  23. tree commented on Nov 12

    inflation is low, reminds me of “home prices are not in a bubble”. two years ago every day I hear California real estate prices are going to keep climbing because of supply and demand. builders cannot possibly build enough homes to keep up with the population growth. I guess everyone is trying to sell something (homes) (low inflation) etc… Ebentually the truth comes out.

  24. John commented on Nov 12

    It’s amazing even shop assistants who get onto the topic laugh about inflation statistics. If you can believe them is the common refrain.

  25. Camille, CT commented on Nov 12

    The local shopping mall and stores were packed here this weekend. I think it was driven by early sales…lots of stores were marking prices down. Didn’t we see something similar last year when people did their shopping way early and then the sales numbers slumped as we approached X-mas? Doesn’t matter to me as I’m a scrooge and am just offering my gracious company and hugs instead of gifts this year.

    I thought I’d just get to the true meaning (cheapskate) of the holidays this year.

  26. steve commented on Nov 12

    Brad Delong, who actually knows what he is talking about, and has the credentials that demonstrate he knows what he is talking about, has already answered you here:

    http://delong.typepad.com/sdj/2007/09/index.html

    As I recall, your response was to claim you had not made your views clear- actually your views were quite clear, and quite wrong. What you seem to be advocating is a depression, so perhaps you should stick to your day-trading job and leave policy to the qualified- or at least the educated.

  27. tjofpa commented on Nov 13

    Wow, Barry. U got some surfer dude over on the left coast critiqing u’re posts.

    2nd time I’ve seen a ref to Brad DeLong of UC Berkeley in the past week.

    Is this the same UC BERK that’s about to take a $500 Mil bribe from BP to stifle… er, I mean… HELP research new alternatives to fossil fuels?

  28. Les commented on Nov 13

    “Why are L/T interest rates near record lows if inflation is understated and rising? I thought fixed income investors were “smarter” than equity investors.”

    The Bush administration has shifted to shorter-term treasuries.

    Secondly, fixed-income investors, as defined by individual investors, mutual funds, banks, insurance cos, and pension funds, have sold off one-third of their holdings of treasuries per the BMA.

    http://www.sifma.org/research/pdf/HoldersTreasurySecurities.pdf

    The Monetary Authority and foreign governments have become the principal holders.

  29. Walker commented on Nov 14

    This is the statement that Brad DeLong makes

    However, when increases in inflation are confined to (i) energy and (ii) food prices, odds are that the increase is transitory and will be self-limiting.

    He provides no evidence for this, yet his entire argument hangs on this claim. Barry’s claim is that this assumption is false, as they have now become decoupled. He supports this argument with data — unlike Brad DeLong, who neither supports this claim nor comments on the analysis of Barry’s data.

    I am academic. I don’t have a lot of respect for academics like Brad DeLong that make sloppy arguments like this. This is the type of crap that gives professional economists bad names.

Read this next.

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