Welcome inflation. Thanks be to you, central banks

You are the sunflower, dear consumer

We have been warning for some time about the coming inflation hailstorm and drop in the standard of living in countries that are debasing their currencies at a rapid rate, with the US, UK and Europe being the most successful ‘debasers’ (so far).

The risk has always been that the rate of increase in commodity prices, forces producers to cut costs (job cuts, mechanisation, lower marketing spend, etc) in order to enable themselves to purchase the factors of production land, labour, technology, and resources, at a discount and sell the final product to either the next stage in the production structure or to the consumer, at a profit.

Without profit or the prospect of profit, no capitalist will be willing to spend money in order to arrange the factors into a final product, so there will be a drop in the supply of goods in the economy.  More money printing will only exacerbate these problems, especially when companies cannot reduce costs elsewhere or improve efficiencies to offset rising commodity prices.  We are now at this point, and the Fed has shown its hand by promising to print another $600bn in 6 months.

Businesses globally will be forced to pass the higher input costs onto consumers.  Note this will again coincide with another round of non-commodity price cost cutting, where it can still be done.

Important for you as a consumer to know is that it also means we will see a deterioration in the quality of the products we consume, despite costing the same or higher price than before.  The CPI numbers DO NOT adjust for this loss of quality in consumer goods.  In the US, through hedonic adjustments, the CPI tries to do adjust for quality when it is improving, but not when quality is falling.

So when you now buy a chocolate bar that used to cost R5 and now costs R6, but that now weighs 50g instead of 60g, there is a real inflation there of 20% plus 17%, which comes to nearly 40% price inflation.

Food Sellers Grit Teeth, Raise Prices

Packagers and Supermarkets Pressured to Pass Along Rising Costs, Even as Consumers Pinch Pennies

NOVEMBER 4, 2010

An inflationary tide is beginning to ripple through America’s supermarkets and restaurants, threatening to end the tamest year of food pricing in nearly two decades.

Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months. And food makers and retailers including McDonald’s Corp., Kellogg Co. and Kroger Co. have begun to signal that they’ll try to make consumers shoulder more of the higher costs for ingredients.

For food executives, how quickly to pass along higher costs presents difficult choices. Missteps could be costly when the economy remains weak. Many Americans, nervous about high unemployment, have pledged allegiance to their pennies and are willing to trade down on brands, switch supermarkets, opt for Burger King over Applebee’s, or stop dining out altogether to save money.

“The big challenge will be, how much can we swallow and how much can we pass along?” said Jack Brown, chief executive of Stater Bros. Markets, a 167-store grocery chain in southern California.

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Secret Walmart Survey Shows Inflation Already Here

Published: Thursday, 11 Nov 2010 | 2:59 PM ET

By: John Melloy
Executive Producer, Fast Money

There might not have been a second round of quantitative easing, if Federal Reserve Chairman Ben Bernanke shopped at Walmart.

A new pricing survey of products sold at the world’s largest retailer Walmart showed a 0.6 percent price increase in just the last two months, according to MKM Partners. At that rate, prices would be close to four percent higher a year from now, double the Fed’s mandate.

The “inaugural price survey shows a small, but meaningful increase on an 86-item grocery basket,” said Patrick McKeever, MKM Partners analyst, in a note. Most of the items McKeever chose to track were every day items like food and detergent and made by national brands.

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Gap, Wal-Mart Clothing Costs Rise on `Terrifying’ Cotton Prices

By Bloomberg News – Nov 16, 2010 3:48 AM GMT+0200

Gap Inc., J.C. Penney Co. and other U.S. retailers may have to pay Chinese suppliers as much as 30 percent more for clothes as surging cotton prices boost costs.

“It’s a little terrifying to deal with cotton suppliers now,” said Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise Ltd., a closely held, Jiangsu province-based clothes maker that counts Gap and J.C. Penney among its clients.

Cotton futures in China have surged more than 70 percent this year and were at a record earlier as the global economy emerged from recession, allowing people to spend more on clothes. Production of the fiber in China, the world’s biggest user and importer, is forecast to lag behind demand for a 12th year, cutting its stockpile to the smallest since 1995, according to the U.S. Department of Agriculture.

“American consumers better get used to rising prices on the shelves of Wal-Mart and other retailers,” said Jessica Lo, Shanghai-based managing director at China Market Research Group. “China’s manufacturers are getting squeezed not only by rising cotton costs but also soaring real estate and labor costs.”

John Ermatinger, Gap’s Asia president, declined to say whether it would raise prices. “We are going to be mindful of our competition,” he said in a Nov. 10 interview in Shanghai. “We are going to be mindful of our consumer. That’s how we’ll ultimately establish our prices.”

Shandong Zaozhuang Tianlong Knitting Co., which makes Polo Ralph Lauren Corp. T-shirts and track suits for Le Coq Sportif Holding SA, has raised prices as much as 70 percent from a year earlier, said sales manager Fred Hu. “If cotton keeps rising like this, we will need to lift prices by 30 percent by the Spring Festival next year or we lose money.”

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