Economics Minute: An Periodic Economically-Minded Blog for Business Leaders with Economic Lenses
Well, despite the title of this blog it’s not quite as bad as all that. But something is brewing and it may not be nice. First let’s talk of conventional wisdom. Today in the US print edition of the Wall Street Journal: “US Stocks Rise as Inflation Fears Ebb”. It seems the Labor Department published a report that suggested the consumer price index was increasing at a slower than expected rate, around 0.2% in April. This helped demonstrate stability in markets and triggered a drop in US treasury yields. The Fed, so the theory (or conventional wisdom) goes is cautiously confident that US economic growth is not over-heating so demands for the next interest rate increase are falling or at least not increasing. So far, so good.
But the day before there were some inflation numbers that really signaled something else entirely. In yesterday’s US print edition of the Wall Street Journal was, “Firms Struggle to Pass On Higher Costs”. The article notes several inflationary data further up the supply chain. These impact firms that consumers don’t necessarily know or think about since what they do flows into the value chain for products and services that consumers see when they make their ultimate purchase.
Here are some of the data:
- Intermediate prices for process goods, such as metals, paint and fuel rose 4.7% in April
- Of which, gasoline was up 14.6%
- Of which, steel mill products was up 7.4%
- Intermediate services, spanning warehousing costs to security guards, increased 3.1% from a year earlier
- Business charges to customers up 2.6% in April from a year earlier
Other anecdotal price changes noted:
- Whirlpool items between 5% and 7%
- Retail prices at Lowe’s and Home Depot 15% for Whirlpool and 7% for Maytag in April
Such notable increases further back up the supply chain, some affecting large capital goods, is a sign that inflation is building. Only two three things can happen: margins fall as firms swallow the increasing costs; prices to consumers rise to maintain margins; or these price increases abate and start to fall again. It is just a matter of time before we see the answer but it feels like a real uptick in the CPI is coming; that is unless you believe raw material prices will fall again and quickly.
Emerging Markets (EM) are also under pressure. Currency demand is deflating in EMs and back into the dollar, hence its short-term run up in value. This puts pressure on indebted countries and those with poor economic conditions. Argentina is currently suffering big-time and though its currency reserves are still sizable, about $60bn down from $65bn to protect its currency, it has already started talks with the IMF. See Argentina’s Moves to Prop Up Currency Futile.
Add to this the new record levels of US corporate bonds and debt (see Deteriorating Picture- Ratings Slide as Companies Binge in Bonds) one wonders what will happen next. It might something like this:
- In the US, notable inflation at the consumer level will push through by July
- US interest rates will continue to increase and most likely at an accelerated rate (original forecast was for, I believe, three increases in the year)
- The most leveraged firms (states and countries?) will be exposed and may have to cut costs as debt servicing increases
- Those firms that are less leveraged will be readily able to operate at the expense of those most leveraged.
The good news is US consumer demand will drive US growth to new levels which will keep the US government (and many more states) flush with cash. This ‘Trump Surplus” will ease the concern in US debt that quietly bubbles away. I will keep one eye on raw material and factory gate prices to monitor the inflation triggers.