Fascinating chart from Kevin Depew over at Minyanville, massaged from the PPI data released this AM:
Kevin takes the spread between the index of Finished Goods, less the cost inputs of the raw materials (Crude Goods).
The spread has flipped negative in 2003, and has significantly widened since then. This suggests that inflationary price pressures are building, mostly due to higher raw material costs. Ordinarily, there is often a lag between pass-through costs, and pricing pressures — but the current situation represents an extreme.
This leaves manufactures with one of two options: They can raise prices, or they can suffer margin pressure.
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Click for bigger chart
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Kevin adds:
"This shows increasing pressure on producers to rein in raw materials costs that are not keeping pace with finished goods costs. In other words, the pass through of increasing costs is reaching extreme levels. Virtually every conference call we listen to says the same thing. That is why the consumer is so important now. Corporate profits are getting crushed right as we head into a consumer recession."
Good stuff — thanks, Kevin.
Producers/manufacturers already are raising prices – though very slyly. They reduce the size and/or weight of the product, though keep the same price. This seems to be quite common today and a spreading practice up and down the supply chain. We have had to adjust our order quantities and supply needs for the “new” lower quantities.
One wonders if this sly technique is being reflected in the latest inflation figures (me doubts it.)
I can verify firsthand they are REDUCING OUNCES. I had to go back to my (UNION) grocery stocking job after 20 years,(medical insur $25K last yr incl. co-pay is killing us) stocking dog food for instance, the old bag was 37.5 lbs, the 2 new ones on the load were 34 lbs. This was obvious, most is stealth, like salad dressings, they are introducing “designer colors series”, the bottles are TINY!.
After 6 months, I get my medical back(Kaiser)amen.
If manufactures can transfer their costs to prices, the inflation should rise. If they cannot, company profits should get lower. Either way it goes, it should have a negative impact on the stock market.
If they could raise prices, they would. We are in a world of rampant over-capacity. Record high profit margins are reversing.
AustinCo.
yes indeeed they are. My wife pointed out the other day that the “half-gal” of ice cream she recently bought, which several years ago became 1.75 quarts, has now been reduced again!!….to 1.65 quarts if I remember correctly
There’s a problem with this graph, you cannot assume that the spread of Finished Goods less costs of inputs will prevail, the costs of inputs are just a share of the total finished price.
Of course this signal that a pressure on producers are on the way, but don’t take that as all true.
And even if the costs is raising on the supply side, without retail buyers willing to spend the core retail prices may not get higher.
Barry, I’d love to hear your comments on the Fed’s ability to control inflation via increased interest rates. It seems that most of the direct sources of inflation (international economic demand) are not influenced by the Fed’s interst rate policies. So, the fact that gas is $4 is out of the control of the Fed and seemingly if they raised interest rates in an attempt to control inflation they could do more harm (economic deterrant) without having any impact on inflation. What say, ye? Thanks
JamesA,
The fed can’t control prices for oil. It also can`t control prices for Corn Flakes, rent, milk, 1/4″ hex nuts, or pretty much any other relative prices.
The fed can control exactly one price, the rental of risk free overnight money. That price, does heavily influence aggregate prices.
Gas at $4 isn’t inflation. An increase in gas prices will be offset by declines in other prices and aggregate prices will stay constant if there’s no inflation.
When the price or lack thereof of that over night money finds its way into consumables, the middle class by and large ends up with more expensive CO2 instead of more stuff. Not a good trade off. And the extra cash goes to those who would see us reduced to ash.
We’ve noticed the sandwich chain (Specialty’s) near our office building (Seattle, WA) has reduced the size of their sandwiches multiple times over the past year. First the bread got thinner, then smaller, and standard items started becoming optional “add ons”. Prices, of course, have not gone down–in fact, they’ve gone up. I’ve heard of the “latte index” — wonder how long until a venti becomes a grande…
john hussman does good analysis and has been harping on record high profit margins being unsustainable and how and why that matters on SP500 valuation. profit margins are a very mean reverting series and were close to all time highs. that’s a major reason why the SP500 could be materially overvalued; it’s got an above average multiple put onto earnings at record high margins. those margins are very, very likely to revert to the mean and we’ll see much slower or neg growth in SP500 earnings in the short term. that typically isn’t a recipe for a rising market.
i don’t make predictions but i make decisions based on probable outcomes over many observations. based on an above average multiple, record high margins, inflation pressure on margins, a weak consumer, etc, etc, i just don’t think it’s very probable that margins expand, or PEs expand to drive profits and market valuations higher. we have inflation driving mediocre rev growth…and that typically doesn’t lead to nice returns.
i could be dead wrong this time, but i’m okay with that because over the long term the average works in my favor.
that and $4.95 gets me a double decaf latte at starbucks.
Interest rates don’t control raw materials costs? Let me tell you what they don’t want you to know. Monetary inflation is driving the cost of commodities, and it is traced right back to our federal government and the federal reserve. With massive tax cuts, massive spending programs, unfunded bailouts of the banking sector, an unfunded war, along with artificially low interest rates, the stoking of inflationary pressures are only beginning. Paul Volcker slayed the inflationary beast once, dropping the price of oil from $70 in 1980 to under $20 in 1987. His successor Greenspan was like a child playing with matches, and brought him back to life.
Barry, you need to turn a frown upside down.
CBOT grain futures have been falling back.
Spyder QQQ has been rising. There’s plenty
of room on the four Big Oil gravey trains.
Things have never looked more predictable,
when they drag TBoone out to shill-shill,
and MS-NBC-Yahoo are playing for hoorahs.
This from a foreign friend in warmer clime,
tried to explain the phrase “rat race” to:
—
“All these evils pass the foreign peoples from their obsession to work, with the impression – an abnormal theory of the Enlightenment – that, once people work as a community, and once gathered in cities, facilitating each other’s life and spend more together. But doing what? Working!
We have our own historical experience, which shows that whatever you do, two measures at land and a wait and wait, life is what we eat, what we drink and what grab the ass.”
—
Our children will wear Saudi dog collars and bark in Mandarin, but that’s their problem.