Tuesday, August 23, 2005

Trickle-Down Inflation

“Every vendor that delivers to my stores, their fuel charges are going up and they’re passing the costs along to us.”—Glen Rega, local supermarket owner, in ‘The Trickle-Down Costs of Higher Oil’ from the New York Times, August 21.

The price of oil is trickling down into the real world, and making itself felt to consumers and retailers and distributors alike in ways apparently not contemplated by the various price indices.

In a brief but information-packed story in the Connecticut section of the Sunday New York Times, real people who run real businesses talked about the impact of rising energy costs—some being borne by the business and some being passed on to the consumer.

And some appearing in the strangest places.

Mr. Rega said he just received notice of a price increase from his linen company, which cleans the aprons and smocks used by deli workers and cashiers.

Too bad that linen company can’t fly the smocks and aprons to China or India to get them cleaned.

But it's not just linens. It seems that a very large segment of the economy is not able to offset the cost squeeze by packing up and moving to Guangdong Province or Bangalore.

Rick Crays, for example, owns a flower shop in Fairfield and is “getting ready to make an adjustment” to cover the cost of delivering flowers (as many as 60 each day). The adjustment Rick is contemplating amounts to a 10 percent hike in the delivery charge.

Marty McCarthy, a pizza store owner, doesn’t have Rick's delivery cost problem, because Marty's pizza drivers pay for their own gas (how’s that for trickle-down inflation!).

However, the story notes:

[McCarthy] does have to deal with the rising costs of the ingredients, all of which are dropped off by truck.

The reporter also talked to movers (the cost of diesel fuel) and home builders (the price of asphalt shingles) now raising prices to cover the rising cost of just doing their job every day.

Larry Buck, manager of Feinsod Hardware…feels the pinch of higher fuel costs every time he looks out the door to the store and sees, on the sidewalk, a garbage-can shed for sale. The wholesale price on it went up $27 recently, an increase of more than 10 percent…

Sounds like the “trickle-down” cost of energy has become a flood.

Jeff Matthews
I Am Not Making This Up


Cody Willard said...

Jeff, whatever happened to the "ex-starbucks, energy, food, movies, etc" inflation index? I bet it's been screaming higher, though I would venture that "ex-energy" it's been more tempered lately.

Different note -- technology and the Internet are the great inflation fighers of our economy. We just have to hope that they (continue?) to undermine the standard inflationary pressures that are always present in a fiat-currency-based economy.

dthorn said...

Housing Bubble = Energy Bubble: Milton right again

"Mark Turner, ... the chief investment officer of Pentagram Investment Partners predicted the Federal Reserve's easy-money policies -- which then [3/2004] held the overnight federal-funds rate down at 1% -- eventually would wind up dramatically slowing, rather than stimulating, the global economy. That cheap credit would send commodities, and energy in particular, soaring along with real estate." (Barrons 8/22 p.9)


One other anecdote, 1 haircut 3 months ago $17 + $3 tip = $20; today $20 + $5 = $25 (I never seem to have 3 singles). While frequently being accused of losing my head, I have yet to be able to send it to guangdong for an affordable shear.

whydibuy said...

Please tell the bond market, they don't see what we see. Must be a new era. I can find no historical precedent where energy ( going back to the coal days ) shot up and interest rates dropped down in response. Historically, they have moved in near lockstep so this behaivior has me totally baffled.

whydibuy said...

Ya know, if you had assured me that oil would be at 67.00 by 2005 in 2001, aside from the obvious of loading up on energy, I would have bet a significant amount that interest rates on the long end would climb to 7-8-9% in reponse to such an inflationary underpinning. I would have lost my ass by this complete divergence of the oil/ interest rate relationship. Which makes me wonder how all those derivatives out there based on historical relationships between financial instruments are doing in this bizzare environment. Could their existence be a factor in the disconnect of the interest rates from inflation relationship? Something is happening that I cannot fathom.

Alex Khenkin said...

I'd venture a guess as to what's different now - globalization. Makes it all the harder to navigate - nothing like this happened since reliable economic data's been kept. It may be similar to going off gold standard in '71 in its uniqueness - it can only happen once, and we have no prior experience to deal with it.
Small Investor Chronicles

BelowTheCrowd said...

Definitely resembles the situation in my neighborhood, as I noted in my last couple of brief notes:


Its_strange said...

Imagine how happy your local landscaper will be once he doesn't have to run those lawn mowers and blowers all day. ..Yes, time to lose money plowing snow while the heating bill goes up and up !

EricBrock said...

Energy costs are high, that is obvious. They have been high for a while, but I haven't seen wages being raised to cover them. More likely that money going to Exxon comes out the hide of Wal-Mart.

DaleW said...

Please tell the bond market, they don't see what we see.

Yes, exactly. How is it the biggest, baddest, most liquid market in the world misses all this inflation? Low interest rates have persisted way too long for it to be a technical abberation. In the absense of a more compelling answer, I assuming an efficient market indicates there is no end-market inflation now and none implied by the the 10-year treasury.

DaleW said...

there is no end-market inflation

Let me rephrase. I assume end-maket inflation is adequately captured in the available aggregate statistics.

hedged said...

here is my theory

energy costs are only one component of input costs. Labor costs are a far higher component in our service economy. The labor market is still incredibly slack, with real wages declining or stagnant (I think it's fair to "blame" globalization for this). Ergo, energy costs have increased without concomitant increases in consumer prices. Of course, at some point this can't continue if energy prices continue to rise.

DaleW said...

energy costs are only one component of input costs. Labor costs are a far higher component in our service economy.

This isn't a theory, these are the facts.

EricBrock said...

Right, labor costs are not participating in the cost push inflation story.

The store owner in this article didn't say he was raising his employees wages to help them battle this inflation.

Sith Lord said...

Do you want to comment on this?

Q. Let's be honest. You know more than one billionaire, and you say that you, family, and friends already own an enormous piece of Overstock. Why not just avoid the hassles of the public market, give shareholders the $77-ish per share that your lawsuit suggests the stock is worth, and take it private?

A. We did. About 100% of the shares are owned by family, friends, and a handful of institutions (I don't know for sure). The problem is, there exists an additional 3%-70% of the company in electronically counterfeited shares scattered throughout the system. Why pay to buy up counterfeit shares?


Aaron Koral said...

Hi Jeff - I was just curious as to your opinion on commodities as an inflationary play? My thinking here is that oil isn't the only commodity make price waves. Other commodities are having their end goods prices head higher as well (copper, coffee, etc.) and yet commodity focused businesses trade at cheap P/E's. Perhaps the low P/E is the market's way of "voting" that commodity-focused industries (wood and lumber products immediately comes to mind) will not deliver higher "expected" earnings in the near term? Keep up the great work!

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