As I said in my recent Patron Post,
We’ve now hit that critical juncture when price inflation is picking up momentum quickly…. Shortly after COVID assailed the world, I began to say, especially in my Patron Posts, that we had finally entered a period where, for the first time since I’ve been writing this blog, I could see inflation as becoming a serious problem. Unlike many bearish types, I haven’t said it will become the hyperinflation the permabears have been sure the Fed’s money printing would create for years. Yet, I started saying last year, significant inflation would be something to start watching out for.
It could easily push bond interest high enough to threaten the stock market. It could put the brakes on the Fed’s plans to do more stimulus down the road or derail those plans entirely by crashing stocks and bond prices simultaneously. (Higher bond interest/yields equals lower bond prices.) Inflation doesn’t have to go parabolic to cause those kinds of serious problems, besides the dent it will put in your pocketbook. Even if we don’t see anything like hyperinflation (often defined as 100% annual inflation or more), a return to the double-digit inflation of seventies would force interest rates up to double digits, too, just as Fed Chair Paul Volcker had to do in the eighties to tame inflation.
The inflationary rocket keeps building speed as it now flies over the consumer side of the population, something I said was about to show up in that last Patron Post:
As go producer prices, so eventually go consumer prices. Businesses are going to be forced to pass this huge escalation in their costs to the prices they charge consumers, and that move is already building velocity:
I listed in that article some of the areas where inflation was showing up. Now we’ve got more areas starting to push through from manufacturers, growers, etc. toward consumers:
Fed up with inflation
This week, the Bloomberg Agriculture Spot Index — which tracks key farm products — surged the most in almost nine years, driven by a rally in crop futures. With global food prices already at the highest since mid-2014, this latest jump is being closely watched because staple crops are a ubiquitous influence on grocery shelves — from bread and pizza dough to meat and even soda.
Soaring raw material prices have broad repercussions for households and businesses, and threaten a world economy trying to recover from the damage of the coronavirus pandemic. They help fuel food inflation, bringing more pain for families that are already grappling with financial pressure from the loss of jobs or incomes.
And it sounds like a lot more is about to come down the pike due to pressure building inside the inflationary engines:
“Companies Are Freaking Out About Soaring Costs” and today we got more confirmation of this in a Bank of America report which warns that Inflation is “arguably the biggest topic during this earnings season, with a broad array of sectors (Consumer/Industrials/Materials) citing inflation pressures.”
The chart below shows the largest jump in history in the number of companies reporting inflationary concerns:
Said office supplier Staples:
We’re expecting substantial inflation headwinds in the low to mid-single-digit increase range.
And said Chipotle Mexican Grill:
We feel like if there is going to be significant increased inflation because of market-driven or because of federal minimum wage, we think everybody in the restaurant industry is going to have to pass those costs along to the customer.
Morgan Stanley has put together a graph of cost pressures that shows a rapid reversal in trend:
Regional Fed manufacturing surveys also show the same stark change happening in the costs that are building behind the scenes, which will hit consumers soon:
Labor pressure building
One producer sums up the price pressures as follows:
It is very difficult to handle the increased business with supply chain issues across all materials and finding anyone who wants to work. The federal government has incentivized people to stay home and not be productive.
Of course people would not be incentivize to stay home if the Federal government that is providing the assistance hadn’t shut down their jobs permanently in its response to COVID. The government is continuing to provide them extra assistance because it forced the termination of jobs many of them liked and did well at by shutting down the economy. As I wrote at the start of all of this the shutdown created permanent damage we’d see this year when we saw how many jobs did not ever come back.
And here is what that looks like:
For all intent and purpose, the labor market situation in America has gone nowhere in 4 months.
We recovered about halfway, which is what I said the US job scenario would do when I was writing about the first improvements seen last June:
In terms of total job recovery, we’ve clearly got a long way to go. June will take us up a lot more than May, but still nowhere near the top [in number of total jobs]. After that, the graph will flatten out…. We won’t see [it] get up to where it was all year and probably not all of next year…. Come back here and tell me all about it if my economic prediction is wrong: There will be NO V-shaped recovery for the economy.
Buy your SpaceX ticket to the moon now
As I warned in my Patron Post,
You can easily see what is coming down the road for the Consumer Price Index (CPI) — the most common gauge of price inflation used in the US. Producers may not be able to pass all of their increasing costs along, but they will be pressured to try, and abundant Fed money will make it easier to pass it along, as I projected a year ago, because the magic formula or runaway inflation is too few goods (and/or services) in an environment of too much money. As a result of Fed and federal government largesse, scarce goods or services that are getting much more expensive to produce will find consumers willing and able to bid up the price to get their hands on some of the limited supply…. We see see this willingness to pay astronomically higher prices due to scarcity playing out already in housing on all across the nation.
Or, as Albert Edwards warns,
Optimism abounds that the consumer will unleash a wave of pent-up spending as economies reopen, backed by a handy stash of surplus savings. Combined with a new ‘can-do’ (or rather a ‘can-spend’) attitude of the fiscal authorities, all things economic and cyclical look tickety-boo – if not a tad frothy.
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Source: Inflation Rockets Launch