- - Thursday, February 17, 2011


This week saw several developments on the inflation front. Producer prices in the U.S. climbed during January to their highest level in more than two years, as U.S. wholesale prices jumped 0.8 percent in January fueled by rising gasoline costs. Core producer prices, which exclude the volatile food and energy categories, rose 0.5 percent, marking the largest increase since October 2008.

Moreover, by looking at the longer-term trend in the producer price data, we can see that prices are indeed on the move. Producer prices have risen 3.6 percent over the past 12 months on an unadjusted basis compared with a more subdued 1.6 percent for core producer prices over the same period.

Like me and some others I know, you’re probably asking: How can you exclude food and energy, when those are two categories that account for more than a fair share of a person’s daily, weekly, monthly spending?

Good question, especially since the upward move in gasoline prices continued into February. According to the U.S. Energy Information Administration (EIA), gasoline prices on Feb. 14 were up $0.53 per gallon compared with prices a year ago — a 20 percent increase to $3.14 per gallon of regular gasoline.

Meanwhile, cash prices for corn, wheat and soybeans have climbed 40 percent to 100 percent versus levels a year ago. Those sharp moves in those grain and feed prices come on the heels of a report that the World Bank’s index for food prices has risen 29 percent since January 2010, pushing 44 million people in developing countries into extreme poverty.

On the consumer price front, late this week we heard from the Bureau of Labor Statistics that the U.S. Consumer Price Index went up 0.4 percent in January, while the core consumer price index was up a more modest 0.2 percent. Like the Producer Price Index, the core consumer price excludes food and energy. Digging into the numbers a bit more, we find that the increases for energy commodities and for food accounted for over two-thirds of the rise in the overall index. Given the latest read on gasoline prices from the EIA, it comes as no surprise that gasoline and fuel oil indexes increased in January. What caught my eye was the index for food at home, which posted its largest increase in more than two years, but again looking at the moves in commodity cash prices for corn, soybeans and so on, that move is hardly a shock.

Aside from food and energy producer and consumer price indexes, other areas to watch include the price indexes for apparel, shelter, airline fares and recreation — all of which have been rising. Turning our eyes to cotton prices, we find that, like the grain and feed commodities, rising demand has been coupled with tight supplies resulting in more than a doubling of cotton prices to roughly $2 per pound. Cotton is not alone as the prices of other synthetic fabrics have jumped roughly 50 percent as demand for alternatives and blends has risen.

The cotton and fabrics price surges have led several apparel manufacturers such as Hanesbrands Inc., Jones Group Inc. and Polo Ralph Lauren Corp. to increase their prices as they look to pass on higher input costs to consumers. Levi Strauss & Co., Wrangler jeans maker VF Corp., J.C. Penney Co., Nike and designer shoe seller Steve Madden also plan increases. As apparel companies report their fourth-quarter results in the coming days, other investors and I will be listening closely for talk of price increases and how they are managing their input costs. All in all, the Strategic Resource Group expects clothing prices to rise nearly 10 percent in the coming months.

We in the United States are not alone in this environment of rising prices.

In the U.K., consumer prices rose at double the Bank of England’s target rate in January, heightening pressure on the bank to raise interest rates. Consumer prices in China rose 4.9 percent in January compared with the same month a year ago, even with reduced emphasis on volatile food prices. The Trade Ministry of Singapore shared that inflation accelerated to 4.6 percent in December, the fastest pace in two years, and now it expects consumer prices to rise 5 percent to 6 percent in the first few months of 2011.

What concerns me is the potential for inflation to slow the burgeoning domestic economic recovery. Granted the Federal Reserve is more bullish on the economy and raised its growth forecast from 3 percent to 3.6 percent to 3.4 percent to 3.9 percent for this year. That said, Federal Reserve officials essentially kept their view on the job market intact and still call for 8.8 percent to 9 percent unemployment this year, only one-tenth of a percentage point lower than its November forecast.

That last part and the negative trend in labor costs or wage pressure given the unemployment rate have me concerned about the ability of consumers to continue to spend as they did in the fourth quarter of 2010. While winter weather may have hampered consumer spending in January, a telltale sign will be how retail sales hold up in the coming months.

In my view, this all plays into the concept behind the cash-strapped consumer investment theme, which is that consumers are opting to save where they can, trade down when possible and seek value for each dollar that is spent.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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