Monday, December 05, 2005

No Haircut to the CPI Here


FedEx will increase 2006 standard list rates for FedEx Ground and FedEx Home Delivery by an average of 3.9%...


Thus reads a headline that came across my screen late Friday afternoon.

Lest it be dismissed as a mere “energy-related” price adjustment and, therefore, dismissible as a “one-time” item to be stricken from the “ex-food and energy” Consumer Price Index, or the “core” Producer Price Index, or whatever adjusted, reconfigured, massaged or otherwise made-up Price Index the bond market wants to look at in order to feel better about owning short term notes that just barely cover the FedEx price hike—keep in mind that the correlation of the U.S. GDP to the index of air cargo activity is 70%.

Consequently, when FedEx and its brethren raise prices, attention, as Mrs. Loman once said, must be paid.

Furthermore, the FedEx headline happened to come on the heals of a Del Monte Foods company conference call in which it was disclosed that unexpected increases in logistics, packing and energy costs added $40 million to cost increases over and above previously anticipated cost increases in the quarter.

The good news, at least for Del Monte? That consumers did not appear to mind the price increase, because volumes held up better than feared.

Perhaps the American consumer is ready for some good old fashioned everything-goes-up inflation, at the very moment that the government has trained the bond market to focus solely on stripped-down, “ex-food and energy and housing and packaging and FedEx and healthcare and insurance and haircuts” number.

I added “haircuts” to the stripped-down CPI based on a very personal experience this weekend: I visited my local barber for my usual $17 haircut.

Only he is no longer charging $17, as he has for the last seven or eight years that I have been using him.

He now charges $22.

Hmmm. $22 divided by $17 is…well, it’s a lot more than whatever the so-called CPI number would like to pretend it is.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

23 comments:

JFB said...

For me, inflation started last year with steel "surcharges"....now it's re-labeled as fuel "surcharges".

In both instances It has been very easy for me to pass this on. That, to me is inflation: when it's easy.
Our raw costs have always gone up...but in the past my customers would balk when I'd try to pass it on.

My solution to FedEx,(and UPS which re-upped at a 5.25% surcharge) is to think out of the box and switch all those trucks over to CNG. I guess then we'd be hit with a "conversion" surcharge.

Sidney Falco said...

A haircut in NYC chinatown still averages $8

Its_strange said...

Gasoline prices artifacially low so the oil companies don't take the heat for a weak shopping season ?

BelowTheCrowd said...

Front Page story in the LA Business Journal this week:

Businesses Get Squeezed by Cost Pressures
Many small and mid-sized businesses throughout Southern California are struggling with inflationary pressures as companies draw up next year’s budgets.

Mostly issues of energy costs, material costs and health care. Quoted a variety of companies who are doing a variety of things to cut back and absorb costs.

Eventually, they won't be able to absorb all the costs themselves.

-btc

Jeff Matthews said...

My take on the gasoline price collapse is simple supply/demand:

1. Gasoline went to $3.00-plus.
2. Demand fell.
3. Meanwhile, cargoes of mogas started were making their way from Rotterdam over to New York to get the high prices in New York harbor.
4. Also, all the refineries began shifting towards gasoline and jet fuel to take advantage of huge (record) spread.
5. Cargoes started arriving from Rotterdam, supply began to meet demand, prices fell.

It always happens that way, so long as the government stays out of it.

Raymond Weklar said...

Inflation started with the housing market (although no one seems to count this as inflation, I do.) The fact that oil, gold, platinum (over $1,000) and copper (at all-time highs) are in bull markets and Fed Ex prices are rising is a clear sign that a new phase of inflation has begun.

As for the price of haircuts, the fact that current Fed chairman Greenspan and incoming Fed chairman Bernanke are balding, does not bode well for them picking up on the fact that inflation has hit the haircut level.

dthorn said...

Jeff, several months ago you had several posts excoriating the WSJ (note to Jesse dont take it too literally)for missing the most important story of the moment: energy. Any thoughts? is energy still a #1 story or, as the number crunchers and the WSJ do, can we all relegate it to some non core compartment?

One other factor with gas prices moderating is that refinery capacity is substantially back on line post hurricane damage. Dont forget that if the crack spread had been closer to historic norms $3 gas implies close to $100 oil so all that happened with gas moving down is crack spreads have narrowed. Not sure it means that much to the price of oil.

So if "It always happens that way, so long as the government stays out of it." when does it happen to oil? is it a bubble? inflation? real lack of current supply? a risk premium? concern about peak oil supply?

One only needs to look at the incredible run and reversal in steel stocks to see how quickly CW on "fundamental" reasons for commodity prices being high for ever can be proven wrong.

Am I the only who thinks oil can trade in the low 40s next summer?

the management said...

Presumably your hairdresser is working on a pricing rule of "round number of $5 bills less $3", and his expected proportional tip has fallen. So the cum-tip price of a haircut is up 20% from $20 to $25. On the other hand if this is the first price rise in seven years, that's an annualised 2.6%, so not really too bad, albeit that I admit that the timing of the eventual price hike is, as the Marxists say, unlikely to be a coincidence.

EinKC said...

JNJ announced that its Personal Products Company is raising its Sanitary Protection line 3-6% in 1Q06. So the CPI number will have to be ex-JNJ. That should make a nice, polished, bond-friendly number.

Peace

BDG123 said...

We can all thank a combination of global events along with The Maestro for a little inflation. Ok, so maybe more than a little. But, it's better than deflation. It is no coincidence that gold and the Nikkei have been pounding upwards lately. It's called a new cycle of global inflation which is taking Japan out of its two decade long deflationary funk. I laugh at the hilarity of gold going up because of increased jewelry demand from China and India. While that may be true, the real reasons are likely a safe haven from exploding global debt and a new long wave cycle of inflation.

Is the American consumer ready for it? I suspect so. Actually corporate profits and the economy did quite nicely through the 70's. The equity markets didn't like it. And if long rates kick it in gear again, the equity markets will puke on this cycle as well. For all of the perma bulls that spew historical average PEs of 16, they might notice whehn alternative investment yields are more than the current three thousand year low of 4%, the equity PE expansion can turn into PE contraction. ie, the 70s when corporate profits grew more than in the 80s and 90s but when inflation was more than the Federales had the kahunas to deal with. Faced with the same situation again, and we don't know if long bond yields will really start to rise too much yet, the Federales will likely crater to political pressures of not stalling the economy and inflation will once again become a significant problem for equities and our economy. No future predictions but IF the situation comes to pass, Mr. Ben will get an opportunity to show us that tremendous philosophical capital contained in his head.

Btw, for the poster who states a haircut is still $8 in NYC's Chinatown, I'd simply state that I prefer not to have a BOWL haircut. :)

DaleW said...

Only he is no longer charging $17, as he has for the last seven or eight years that I have been using him.

He now charges $22.

Hmmm. $22 divided by $17 is…well, it’s a lot more than whatever the so-called CPI number would like to pretend it is.


You know what most non-hedge fund people do in this situation? They get a new barber. Your barber would thus have to consider what his pricing power actually is. Also, what's with his pricing strategy? He didn't raise prices for seven years and then he goes for a 29% increase? How would you describe that? 29% inflation are a revised 3.3% to 3.8% 7-8 year compounded annual inflation rate? Has his product improved at that rate over time? How else has he added value? How has value eroded over that time period? I say if you don't like it, you can put in some search time on finding a new barber with better value characteristics or you can extend by 3.3% to 3.8% the time between your haircuts, just like the all the poor schlub non-hedge fund PMs in this country do and just like all corporations do (figuratively speaking).

McKinsey Quarterly had a good article on inflation and pricing power today (registration required). I would link it, but the URL is too long and TinyURL is out of commission right now.

DaleW said...

How would you describe that? 29% inflation are a revised 3.3% to 3.8% 7-8 year compounded annual inflation rate?

Sorry, I meant "or a..."

Wittgenstein would have a field day with this whole question of description.

black bart said...

Its_strange said...

"Gasoline prices artifacially low so the oil companies don't take the heat for a weak shopping season ?"

That's my take also.

Aaron Koral said...

Hi Jeff - happy holidays to you and your staff. The inflation that bothers me, along with a lot of other people, is in health care insurance. I work for a health care insurer (don't hate the player, hate the game) and I can tell you that the costs to businesses, both large and small, are rising year over year. I know that some companies are starting to "shop around" for insurers that provide the "best" health care coverage at the lowest possible cost, while still other businesses are switching insurance plan types to push the rising costs of health care back onto employees and their families. I think it is only a matter of time before health care coverage, once again, becomes a public policy issue, where the federal government addresses the causes of rising health care costs and examines what insurers can do to reduce those cost burdens on businesses they serve, without sacrificing the quality of health care provided. I agree with btc's post and I hate saying this, but I don't think I'm wrong on this argument...

Sam S. Park said...

I agree that health care costs are definitely going to be a problem to our inflationary pressures.

You can read my last general economic report through this link.

Sam S. Park said...

Dale,

Mckinsey's surveyed CEOs' views on their inability to pass their costs to consumers is a great source. Large companies have little ability to raise prices on generic stuff, whereas the smaller ones may have some ability since their stuff is more specialized. How much more room is there for increasing efficiencies? I wonder how much time before companies simply have no choice but to raise prices.

I guess there's that balance between losing out on volume of sales (from raising prices) vs. biting the cost bullet and hope you can increase productivity forever. It'll be interesting to see how this all plays out.

DaleW said...

I wonder how much time before companies simply have no choice but to raise prices.

Albertson's has put itself up for sale, screaming out for consolidation so US supermarket consolidation matches that in other G7 countries. Wal-Mart earnings super-normal returns, as does P&G, CL, KO, and tons of other consumer products companies. They can either accept lower margins and spreed up turns to maintain their returns or they can accept lower margins and lower returns all the way down to meeting their opportunity cost of capital. I think there's more than enough room for these companies to suck it up.

DaleW said...

Here's Bill Gross's take on your bond market conundrum: http://tinyurl.com/bzbqj

(The latest Investment Outlook with URL shrunk)

Sam S. Park said...
This comment has been removed by a blog administrator.
Sam S. Park said...

Bill Gross' take on easing short rates assumes that it is the response to a slowing economy next year. In order for the easing to happen, several things need to be realized.

Maybe Mr. Gross' secret is that rates are already high. And since companies can't really raise their prices for their products/services, these companies will need to bite the bullet.

Profit margins and EPS may fall. If so, that doesn't look good for the stock market. All this because these companies had to suck it up. Not all companies are like WalMart, most companies don't suck as well as WalMart (no pun intended).

DaleW said...

Sam,
He says slowing, not declining. I don't think you need corproate profits to fall, but I don't know if you get GDP growing at a 4.5% rate next year.
Dale

Serenity said...

For all this inflation talk, which I'm sure is happening for raw materials, fuel, etc.

What about the impact of technology on productivity and cheap labor from China? Those two factors surely aren't going away in the next 2 years.

Maybe I'm a bit myopic since I'm mainly a tech geek, but when I look at the prices of gadgets, computers, memory, etc. The capability, power, and functionality keep increasing at lower and lower prices.

When I go to a Walmart and Target, I'm still befuddled how they can make clothes, toys, etc. ship it around the world, and have it cost so little.

So yes certain things like fuel are costing more, but will it really overcome the deflationary affect of cheap Chinese labor and technology productivity? I'm not so sure.

brenda said...

About the price of that haircut...
Stylists are paid commission...And deserve a raise occassionally just like everyone else. How are they supposed to get one if not by raising their prices? Considering that they have to go to school to earn a degree and are constantly monitered and have to be licensed...Why would you think that they would work for minimum wage or just above it? As the cost of living goes up....so do our prices. We have to make a living too!
If your not getting quality service for the price, try looking elswhere. Your haircut is a fashion accessory that you wear on a daily basis.
You get what you pay for!